Overuse of cess

Swachh Bharat cess has some disquieting implications

Last week, the finance ministry said that, from November 15, the government would impose a cess of 0.5 per cent on all services on which service tax is paid. The proceeds from this cess would be meant exclusively for the government's Swachh Bharat initiative. Being a cess, the entire proceeds would remain with the Centre and would not have to be compulsorily shared with the states. Defending the new levy, the notification said "this is not another tax". It added that it was a "step towards involving each and every citizen in making a contribution to Swachh Bharat". For a full year, if taxes on services yield the estimated Rs 2.1 lakh crore, then the 0.5 per cent would bring in just over Rs 1,000 crore. Of course, given that the cess is being imposed late in the year, with only four-and-a-half months left, the amount gained will be correspondingly smaller.

The Swachh Bharat cess adds to the existing cesses imposed by the Centre. The education and higher education cesses are budgeted to bring in just under Rs 30,000 crore this year, and are to be spent on the relevant schemes. The road cess on petroleum is budgeted to net just under Rs 50,000 crore. There is also a cess on exports; on clean energy; and so on. The total amount from cesses is Rs 1.16 lakh crore. Naturally, this is small compared to the sums from the major revenue sources. But it is certainly becoming an ever more valuable source of income for the Centre. Indeed, a disquieting trend could be noted. The Fourteenth Finance Commission vastly increased the states' share of the common pool of resources. In effect, the states' share of tax revenues was increased by almost 55 per cent this year, compared to what was transferred in 2014-15. However, the Centre began to react to this generosity almost immediately. The Budget for 2015-16 reduced total central assistance for state Plans by over 26 per cent, reducing the gain in fiscal space for states. It also played around with cesses and surcharges. High-income taxpayers were levied a surcharge of two per cent on income tax; the Rs 9,000 crore to be collected from the new impost would not be shared with the states. The cess on petrol and diesel was also raised, and the money would go only to the Centre; this followed a reduction in excise on the fuels of the same proportion. In effect this transferred the states' share of duties to the Centre. It is difficult not to see the increasing use of cesses and surcharges as the Centre's attempt to regain ground it lost under the Fourteenth Finance Commission, and it appears to run against the government's stated commitment to greater federalism.

As with all cesses, the revenue from the Swachh Bharat cess is earmarked for the government initiative to improve cleanliness. However, unlike say the road cess, there is a lack of clarity on the institutional structure under which these resources will be spent. Swachh Bharat is a laudable initiative. Changing behaviour, a focus of the outreach programme, is important. But it must be followed up by institutional support for greater civic hygiene, especially at the local level.