Datanomics: Centre unmoved even as states call for capping cess, surcharge

Centre unmoved even as states cry for capping cess, surcharge

tax — The government expects ₹1.45 trillion from this cess in the current financial year (FY26), the same as it hopes to garner in the previous financial year (revised estimates).

2 min read Last Updated : Apr 22 2025 | 11:21 AM IST

At a time when states are demanding a higher portion of the divisible central tax pool, the Union government may keep around ₹28,000 crore with itself by raising the cess on petrol and diesel as global rates soften.

At their interactions with the 16th Finance Commission, various state governments, including those run by the National Democratic Alliance NDA, have demanded an increase in their share to 45-50 per cent of the divisible tax pool from the current 41 per cent and capping cess and surcharge or including them in the common pie.

It is a bit puzzling to decipher the relationship between the special additional excise duty that the Centre raised on petrol as well as diesel, and global fuel rates since the former is a lump sum or flat cess. As such, the falling global rates would not have reduced the revenues of the government from this levy.

The government expects ₹1.45 trillion from this cess in the current financial year (FY26), the same as it hopes to garner in the previous financial year (revised estimates). Maybe this is the reason for it to raise the levy by ₹2 a litre each on petrol and diesel to shore up the revenue from this cess in FY26 to a higher level than in 2024-25.

Many argue that the Centre, on the other hand, is sharing revenue losses with the states. For instance, the Union government raised the threshold of annual income to ₹12,00,000 for FY26 from ₹700,000 on which rebates are given to make it income tax-free under the new tax regime. Finance Minister Nirmala Sitharaman had said in her Budget speech that this along with other tweaks will make the government forgo around ₹1 trillion in direct taxes. Most of this revenue forgone, excluding education and health cess, would be shared with states.

However, because of tax buoyancy, direct taxes are projected to grow 12.65 per cent to ₹25.2 trillion in FY26 against ₹22.4 trillion in FY25 (RE), and losses cited above are a sort of theoretical exercise.