Cess pool: On CAG report on GST

ECONOMY/ FEDERALISM/ GOVERNANCE

Topic: General Studies 2:

• Government Budgeting.
• Government policies and interventions for development in various sectors and issues arising out of their design and implementation 

Cess pool: On CAG report on GST

Context: The latest audit of the Union Government’s accounts by Comptroller and Auditor General of India (CAG), was tabled in Parliament 

What is Cess?

• Definition: Cess is a form of tax charged/levied over and above the base tax liability of a taxpayer. 
• Used for Specific Purpose: A cess is usually imposed additionally when the state or the central government looks to raise funds for specific purposes. For example, the government levies an education cess to generate additional revenue for funding primary, secondary, and higher education. 
• Temporary Tax: Cess is not a permanent source of revenue for the government, and it is discontinued when the purpose levying it is fulfilled.
• No Sharing with States: The central government does not need to share the cess with the state government either partially or in full, unlike some other taxes.
• Easy to enact: The procedure for introducing cess is comparatively simpler than getting the provisions done for introducing taxes, which usually means a change in the law. Cess is also easier to modify and abolish.
• Levied on both types of Tax: Cess can be levied on both indirect and direct taxes
• Proceeds of Cess: While all taxes go to the Consolidated Fund of India (CFI), cess may initially go to the CFI but has to be used for the purpose for which it was collected. 
• Unspent Cess Amount: If the cess collected in a particular year goes unspent, it cannot be allocated for other purposes. The amount gets carried over to the next year and can only be used for the cause it was meant for
• Purpose for which it is levied: The government can impose cess for any purposes such as disaster relief, generating funds for cleaning rivers, etc. For example, after Kerala floods in the year 2018, the state government imposed a 1% calamity cess on GST and became the first state to do it
• Cess & GST: Under the GST (Goods and Services Tax) regime, certain sin goods and luxury items also attract a cess.

Key findings of the CAG report related to Cess

• Union Finance Ministry quietly retained over 40% of all cess collections in 2018-19 in the Consolidated Fund of India (CFI).
• As many as 35 different cesses, levies and charges yielded ₹2.75-lakh crore in the year, but just around ₹1.64-lakh crore was remitted to the specific reserve funds for which these cesses were levied.
• Crude Oil Cess: Over 10 years, not a paisa of the ₹1.25-lakh crore of cess collected on crude oil was transferred to an oil industry development body it was meant to finance
• Part of the hefty cess collected as additional excise duties on petrol and diesel, to finance roads and infrastructure, was similarly retained in the CFI. 
• A new 4% Health and Education Cess on income tax was partly deployed towards education, but no fund was created for health. Same with a Social Welfare surcharge levied on customs. 
• The GST Compensation Cess with ₹47,272 crore, was not remitted to its rightful account over the first two years of GST

Analysis of above findings

• Distortion of Union’s Fiscal Position: Such type of Cess practices by Union government helped understate India’s revenue and fiscal deficit numbers
• Did not meet Cess Objective: The purposes for which Parliament approved such cesses — be it health, education or infrastructure development — were not met.
• Distortion of Fiscal Federalism: Compensation cess transfers to States were accounted as Grants-in-aid to States, distorting the Centre-States fiscal math.
• Increased reliance on Cess: Centre’s reliance on cesses and surcharges to raise revenue has increased significantly especially after the States’ share of the divisible pool of taxes was raised to 42% in line with the 14th Finance Commission’s suggestions. 
• Complicates tax structure: There are debated over whether such levies are in sync with a nation trying to simplify its tax regime

Way Forward

• Cesses, starting with the excise duties on petrol and diesel, need to be rationalised.
• Transparency is needed in the management of cess receipts so that Parliament and the people do not need to wait for audit findings 

Connecting the dots:

• Analysis of the working of GST