Cesses set to go with GST, see increase in Budget

The National Democratic Alliance government plans to shift to the goods and service tax (GST) regime on July 1. In the new indirect tax architecture, some existing cesses, that are currently levied, will be done away with.

Yet the government has budgeted for increases in even those cesses that will cease to exist after July 1. The Budget does not separately show collections in the GST regime but continues to project collections for excise duties and services taxes through the year. This has led experts to question whether the government has factored in the impact of the shift to GST in the Budget, including that on the schemes that are funded from cess collections.

The Budget pegs the cess and surcharge collections for FY18 at Rs 2.96 lakh crore — a jump of Rs 46,298 crore over the Revised Estimates (RE) of FY17. These cesses and surcharges include the ones imposed along with both direct and indirect taxes.

A senior tax consultant, speaking to Business Standard, said: “The government does not appear to have budgeted any GST receipts anywhere else in the Budget, which has been prepared on the basis of existing taxes such as excise and service tax.”

He added, “If the BE (budgetary estimate) for 2017-18 had been apportioned as three months for the existing taxes and nine months for GST, such an interpretation would have made sense. Since the entire Budget has been made considering the existing indirect taxes, it is likely that changes on account of GST would only form part of the RE calculations at a later part of the year.” The tax consultant did not wish to be named. 

Satya Poddar, advisor, EY, concurs: “I suspect the Budget estimate of cesses is a projection of the current cess levies only. The current cesses are expected to be subsumed in GST.” 

In the new indirect tax regime, the excise and service tax will be subsumed in GST. The Union government will continue to impose cesses on those items that remain outside the GST net, such as oil and oil products and the clean environment cess.

Additionally, the Centre will levy a special cess on four categories of products that are to be taxed at the highest rate of 28%. But this is meant for compensating the states for the loss of revenue arising out of the transition to GST. 

There is also lack of clarity on whether this new cess to be distributed to the states has been accounted for. “There is speculation on whether the government has considered the proceeds emanating from the cess proposed to be levied on specific products to be taxed at 28% under GST,” said the tax expert quoted above, anonymously.

Collections from cesses are meant to fund specific government programmes. To give an example, the government has budgeted to collect Rs 13,300 crore from the Swachh Bharat Cess. This is to be utilised for the Swachh Bharat Scheme, for which the government has budgeted a spending of Rs 16,248 crore in FY18.

If the cess is done away with after the imposition of GST, the government will have to find alternative routes to fund this scheme. Similarly, the rural development programmes funded through Rs 8,800 crore collected under the Krishi Kalyan Cess will have to find other sources of funding.

Poddar notes, “The special programmes funded by the cess will in future be funded by GST revenues.”

The Union government will be able to retain a chunk of the cess that it currently imposes on oil products, along with the ones imposed with direct taxes and customs duty. 

It will continue to impose the clean environment cess imposed on the sale of coal. The government has currently budgeted for Rs 29,700 crore against this.

M S Mani, senior director at Deloitte India, said ideally there should have been no cesses or surcharges in the GST framework and the cess on 28% products was already a departure from the agreed GST architecture. The continuation of any other cess would further vitiate the effectiveness of the GST framework and the abolition of the research & development cess is a welcome step in this regard.