Cess and surcharge as deductions

  • November 16, 2022
  • Posted by: OptimizeIAS Team
  • Category: DPN Topics
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Cess and surcharge as deductions

Subject: Economy

Section: Fiscal policy

Context:

India’s fiscal federalism turning into coercive because of increasing cess and surcharges

Cess and surcharge are the taxes levied by the Union Government in order to raise funds for government operations. Though both Cess and Surcharge add money to the government’s revenue, these are different in many aspects.

Cess

Example-Every individual in India is liable to pay income tax and has to also pay the health and education cess at the rate of 4% on the tax including surcharge.

Definition– A cess is collected by the government for the development of a particular service or sector. So, as the name suggests, the health and education cess cannot be used for any other means. Cess is imposed as an additional tax besides the existing tax (tax on tax). However, certain cesses, such as the Swachh Bharat Cess (SBC), are levied as a percentage of the total value. The SBC is 0.5 percent of the total value of the facilities in this case.

Cess is paid to the Consolidated Fund of India, but it can only be used for particular purposes.

Cess

Article 270 of the Constitution allows cess to be excluded from the purview of the divisible pool of taxes that the Union government must share with the States.

The process of cess levying occurs after Parliament has authorised its creation through an enabling legislation that specifies the purpose for which the funds are being raised.

There are 42 cesses that have been levied at various times since 1944 as listed in a report by the Vidhi Centre for Legal Policy in August 2018.

The very first cess was levied on matches, according to this study.

Post Independence, the cess taxes were linked initially to the development of a particular industry, including a salt cess and a tea cess in 1953.

The introduction of the The Goods and Services tax (GST) in 2017 led to most cesses being done away with and as of August 2018, there were only seven cesses that continued to be levied. These were:

  • Cess on Exports
  • Cess on Crude Oil
  • Health and Education Cess
  • Road and Infrastructure Cess,
  • Other Construction Workers Welfare Cess,
  • National Calamity Contingent Duty
  • Duty on Tobacco and Tobacco Products
  • The GST Compensation Cess.
  • The Finance Minister Nirmala Sitharaman introduced a new cess — a Health Cess of 5% on imported medical devices — in the Finance Bill for 2020-2021.

Surcharge

Example-

  • In the case of individuals earning a net taxable salary of more than Rs 1 crore, a surcharge of 10% is levied on tax liability.
  • Surcharge at the rate of 5% is levied on domestic corporations if net income is in the range of Rs 1 cr to Rs 10 cr. If the net income exceeds Rs 10 cr, surcharge at the rate of 10% is levied.
  • Surcharge at the rate of 2% is levied on foreign corporations if the net income is in the range of Rs 1 cr to Rs 10 cr.
  • If the net income exceeds Rs 10 cr, the surcharge is increased to 5%. Marginal relief is given to both domestic and foreign companies in case the net income exceeds Rs 1 cr and Rs 10 cr.

Definition-A surcharge applies to those persons whose income is more than Rs. 50 lakhs. This money is not collected for any specific cause, but can be used for any reason as the Union Government sees fit. Interestingly, it is applicable on the tax payable and not the total income. This collection also goes to the Consolidated Fund of India and can be used for any purpose.

The surcharge is a fee added to any tax that has already been paid. The surcharge is a term that refers to an extra fee or levy. Personal income tax (on high-income slabs and the ultra-wealthy) and corporate income tax are the two largest surcharges.

It’s worth noting that it only applies to the tax due, not the whole income.

Cess and surcharge as deductions economy