Centre hopes to mop up Rs 4.4 trillion from cess and surcharges in FY20

The central government hopes to ramp up its collections from cess and surcharges to Rs 4.4 trillion in 2019-20, up from Rs 3.04 trillion last year. This amounts to 17.24 per cent of the centre’s gross tax collections in FY20 - a ten year high. To put this amount in perspective - consider that the centre’s entire capital expenditure for 2019-20 is pegged at Rs 3.36 trillion.  

Unlike all other taxes collected by the union government, revenues from surcharges and cess are not shared with states. Under the terms set by the 14th finance commission, states receive 42 per cent share of all other central taxes, which is collectively called the divisible tax pool.

While an increase in cess and surcharges consequently denies states a higher share of taxes collected by the centre, such a revenue stream helps shore up the central government's coffers. This jump in collections from cess and surcharges comes at a time when the centre is struggling to meet its revenue expectations for the current year. Revised estimates show that the centre expects its goods and services tax (GST) collections to be Rs 1 trillion lower than what was budgeted earlier. Analysts are skeptical that the shortfall could be bigger. For FY2020, the centre has kept it CGST target at the same level as budgeted for FY19.  

The above calculations do not factor in the amount spent by the centre in collecting taxes which is also excluded from the divisible tax pool. This amount which is provided in the budget separately for both direct and indirect taxes amounts to less than Rs 15,000 crores in 2019-20.

A look back at the trends over the past 10 years shows that the National Democratic Alliance government’s regime began with the central government holding back 17.2 per cent of the taxes as cess and surcharge in 2014-15. But these collections dipped to 13.24 per cent of gross tax revenues in 2017-18, only to rise back to a 10-year high in FY20. A similar trend is visible during the United Progressive Alliance’s second tenure. 

The introduction of GST in 2017-18 caused a structural break in these arrangements. Several cess and surcharges imposed on top of excise (except for those on petroleum products) and services taxes were done away with and replaced with a GST compensation cess. 

This is to be used to compensate states for any loss of revenue due to the introduction of GST for a period of five years. But late last year the centre amended the GST compensation to states act to appropriate half of the unused compensation cess at the end of each fiscal. This could boost its collections from cesses even further. 

The states’ share in the divisible tax pool presents only half the picture of how much states receive from the centre. State governments also receive support from the central kitty through centrally sponsored schemes, such as Mid-day meal and ICDS schemes.