Explained: What is a cess and how states use it for welfare purposes

Himachal Pradesh's widow and orphan cess on fuel has brought purpose-specific levies into focus. Here's what a cess is and how states use such levies for welfare needs

The Himachal Pradesh government has imposed a widow and orphan cess of 60 paise per litre on petrol and high-speed diesel. The levy came into effect from midnight on August 11, with the revenue earmarked for welfare measures for widows and orphaned children.

 

What is a cess and how is it different from a tax?

 

A cess is a tax levied for a specific, designated purpose. Unlike a tax, which generally contributes to the government’s overall revenues, a cess is imposed to raise money for a particular purpose.

 

In several official reports, the term “tax on tax” is commonly used for a cess because some cesses, such as the health and education cess, are charged on the tax liability rather than directly on income or the value of a good. However, not every cess works this way. A cess can also be levied on the cost of construction, fuel or other specified transactions. A levy used to fund a particular social programme, infrastructure project or worker-welfare initiative is usually termed a welfare or development cess.

 

 

Under Article 270 of the Constitution, cess and surcharge revenues levied by the Union are excluded from the divisible pool of taxes that are shared between the Centre and states. This means revenue from such Union cesses is not devolved to states through the divisible pool.

 

Is there a welfare cess under the central legal framework?

 

Yes. One example is the construction welfare cess, which is specifically aimed at supporting construction workers. The 1 per cent construction welfare cess, known as the Building and Other Construction Workers (BOCW) Cess, is a mandatory welfare levy on construction projects. It was originally introduced under the Building and Other Construction Workers’ Welfare Cess Act, 1996, with the implementation notification issued on September 26, 1996. The legal framework was subsequently updated under Section 100(1) of the Code on Social Security, 2020, with the new framework taking effect on May 8, 2026.

 

The cess is levied at 1 per cent of the total construction cost, excluding the cost of land. It funds welfare measures for construction workers, including safety, health, pensions and educational support, through state welfare boards. Although the legal framework for the cess was developed by Parliament, the money is collected and spent through the states and Union Territories.

 

What fuel-based welfare cesses do other states levy?

 

A prominent example at the Centre is the road cess associated with the Central Road Fund. The fund was revamped in 1998-99 and the Central Road Fund Act came into force in November 2000 during the Atal Bihari Vajpayee government. A cess on petrol and diesel provided a dedicated, non-lapsable pool for road development.

 

At the state level, too, fuel has been used as a base for levies aimed at specific social and infrastructure needs.

 

Kerala

 

Kerala has also used fuel as a source of revenue for social security. The state levies a social security cess of ₹2 per litre on petrol and diesel, introduced in 2023 to support the social security seed fund and welfare pensions. The state had estimated that it would generate about ₹750 crore annually for the social security seed fund.

 

Jammu & Kashmir and Ladakh

 

Jammu & Kashmir levies an employment cess of ₹2 per litre on petrol and ₹1 per litre on diesel, according to Petroleum Planning & Analysis Cell’s (PPAC) state-tax data. The employment cess on petrol and diesel in Jammu & Kashmir was officially enacted under the Jammu and Kashmir Motor Spirit and Diesel Oil (Taxation of Sales) Act, Samvat 2005. However, the modern implementation of specific fixed surcharges designated explicitly as the employment cess component, under Section 3A of the Act, became a prominent component of the local fuel-tax structure during the revenue revisions of 2020.

 

In 2020, Ladakh also levied an employment cess on fuel. According to PPAC, the cess is ₹5 per litre on petrol and ₹1 per litre on diesel.

 

Mizoram

 

Mizoram has linked its fuel cess to broader social infrastructure needs. The state introduced a social infrastructure and services cess of ₹2 per litre on petrol and diesel from September 1, 2024. The levy is intended for social infrastructure and services, including areas such as healthcare and education. The state’s notification provides for the cess alongside a separate road maintenance cess.

 

Nagaland

 

Nagaland, meanwhile, uses a fuel cess specifically for road maintenance. The state levies a road maintenance cess on petroleum products at ₹2 per litre, with the levy intended to raise additional funds for road repair and maintenance. The cess operates alongside the state’s VAT and other levies on fuel. The road maintenance cess on petroleum products was originally introduced at ₹1.50 per litre and was subsequently raised to ₹2 per litre as part of the state’s 2020-21 budget presented in mid-2020.

 

Tripura

 

Tripura has also created a dedicated road-development levy. The Tripura Road Development Cess was established under the Tripura Road Development Cess Act, 2018. The Act provides for a cess on the turnover of sales of petrol, diesel and natural gas, with the proceeds going towards a fund for road development in the state. The Act allows the cess to be levied at a rate of up to 4 per cent of the turnover of sales.