Unhealthy trend

The share of cess and surcharge in tax revenue has risen sharply

In the wake of the Union Budget 2017-18, the government is likely to face a peculiar problem in the coming financial year. Thanks to the central government resorting to the imposition of new cesses and surcharges in almost every Budget, data suggest that close to one-fourth of all central government tax revenue now comes from this category. This unhealthy trend has been strengthening over the past few years and has, in particular, led to a sharp increase in the share of cesses and surcharges in the Union government’s total revenues in the past two years. However, this growing dependence is likely to pose a problem since it is happening at a time when the country is set to transition to a goods and services tax (GST) regime in the next financial year. Many of these cesses and surcharges will be subsumed under the GST and as such it is unclear what will happen to the funding of the programmes and schemes that were linked to them. 

For instance, the government has budgeted for collecting Rs 13,300 crore from the Swachh Bharat cess — a massive jump from Rs 3,926 crore in 2015-16, when it was introduced. Similarly, the Budget estimates of revenue collection from the Krishi Kalyan cess have been upped from Rs 5,000 crore (for 2016-17) to Rs 8,800 crore in just one year. The former cess is to be utilised for the Swachh Bharat scheme, for which the government has budgeted a spending of Rs 16,248 crore in 2017-18, and the latter cess is slated to fund rural development programmes. The question is, what happens to the dedicated funding of these programmes after the imposition of the GST? To be sure, it is not the case that all cesses will be affected. Some cesses such as those levied on oil and oil products and the clean environment cess will not be subsumed in the GST since these items remain outside its purview. But most others will be affected. In essence, the Centre is likely to face an additional fiscal burden when the GST comes into force and, looking back, this is a problem entirely of its own making.

To some extent, it is understandable why the Centre has progressively moved in the direction of employing more cesses and surcharges. The crucial bit is that they do not have to be shared with state governments, and receipts from them are available solely for the central government’s use. At a time when there has been a move towards cutting down centrally sponsored schemes, for which the Centre used to give money to states, and especially given the recommendations of the 14th Finance Commission, which allocated a far bigger share of the Centre’s tax revenues to states, the growing dependence on cesses might resemble a logical recourse. Nevertheless, it is an undesirable option. That is because, by design, it deprives the state governments of tax revenues. Prime Minister Narendra Modi has on many occasions extolled the virtues of cooperative federalism. As such, the increasing use of cesses militates against Centre-state relations. For a variety of reasons then, not the least being prudent fiscal management, the government must reverse this trend.