A cess imposed by the central government is a tax on tax, levied by the government for a specific purpose. Generally, cess is expected to be levied till the time the government gets enough money for that purpose.
For example, a cess for financing primary education – the education cess (which is imposed on all central government taxes) is to be spent only for financing primary education (SSA) and not for any other purposes.
A cess is different from the usual taxes like excise duty and personal income tax as it is imposed as an additional tax besides the existing tax (tax on tax). For example, the education cess of 3% on personal income tax of 30% is imposed as a tax on the prevailing 30%. As a result, the total tax rate goes up to 30.9% (30% basic rate + 3% (cess) of the 30%).
But some cess like the Swachh Bharat Cess (SBC) is imposed as percentage tax on total value. Here the SBC is 0.5% of the value of the services.
Another difference between cess and the usual tax is the way in which tax revenue from cess is kept. Revenue from main taxes like Personal Income taxes is kept at the Consolidated Fund of India (CFI). The government can use it for any purposes.
But the tax revenue from Cess are first credited to the CFI and the Central Government may, after due appropriation made by Parliament, utilise the money for the specified purposes. For example, the proceeds are kept as Central Road Fund (CRF) in the case of fuel cess (on petrol and diesel). The revenue collected is initially credited to the CFI and after adjusting for the cost of collection, Parliament through its appropriation bill credits such proceeds to the Central Road Fund.
Another major feature of cess like surcharges is that the Centre need not share it with states. But regarding all other major taxes, they come under the divisible pool and hence they shall be shared with the states with the recommendations of the Finance Commission.
At present, the main cess is education cess, road cess or (fuel cess), infrastructure cess, clean energy cess, Krishi Kalyan cess and swachh bharat cess.
What is the surcharge?
The surcharge is a charge on any tax, charged on the tax already paid. As the name suggests, the surcharge is an additional charge or tax. The main surcharges are that on personal income tax (on high-income slabs and on super-rich) and on corporate income tax.
From the revenue side, surcharges are important as around 35% of all cesses and surcharges comes from the surcharge on direct taxes.
A surcharge of 10% on personal income tax when the basic personal income tax rate is 30%. Effectively this surcharge of 10% raises the combined tax burden to 33%. This will be the method of calculating the tax of a person whose income is above Rs 1 crore also. But here, the surcharge will be 12%.
A common feature of both surcharge and cess is that the centre need not share it with states. Following are the difference between the usual taxes, surcharge and cess.
- The usual taxes go to the consolidated fund of India and can be spent for any purposes.
- The surcharge also goes to the consolidated fund of India and can be spent for any purposes.
- Cess goes to Consolidated Fund of India but can be spent only for the specific purposes.
The main difference between surcharge and cess is that despite they are not shareable with state governments, the surcharge can be kept with the CFI and spent like any other taxes, the cess should be kept as a separate fund after allocating to CFI and can be spent only for a specific purpose. This means cess can be spent only for the specific purpose for which it is created. If the purpose for which the cess is created is fulfilled, it should be eliminated.