Cesses and Surcharges: A Complex Issue Raised by Arvind Panagariya

Subject: Economy

Section: Monetary Policy

Key Points Discussed by Arvind Panagariya, Chairman of the 16th Finance Commission

Cesses and Surcharges – A Contentious Issue

The growing reliance of the Centre on cesses and surcharges has raised concerns among States.
States’ Grievances: These levies are not shared with States, unlike the divisible tax pool, creating fiscal imbalance.

Historical Context and Trends

Increase in States’ Share:
- States’ share in the divisible tax pool increased from 32% (13th Finance Commission) to 42% (14th Finance Commission).
Centre’s Response:
- To offset reduced fiscal space, the Centre has turned to cesses and surcharges, permissible under the Constitutional framework.
Revenue from Cesses and Surcharges
- Their share in the gross tax revenue has risen significantly, intensifying demands from States to:
Cap such levies.
- Include any surplus revenue beyond the cap in the divisible tax pool.
Constitutional Provision
- The Centre’s entitlement to collect cesses and surcharges is legally supported by Constitutional provisions.

Key Differences between Cess, Surcharge, and Usual Taxes

Aspect	Cess	Surcharge	Usual Taxes
Purpose	Specific purpose (e.g., education, roads)	General revenue	General revenue
Collection	Imposed as additional tax	Imposed on existing tax	Regular tax rates
Fund Allocation	Credited to CFI but allocated for specific purposes	Credited to CFI, spent as needed	Credited to CFI, spent as needed
Sharing with States	Not shared	Not shared	Shared with states via divisible pool
Temporary Nature	Eliminated once purpose is fulfilled	No such condition	Regular feature of tax system
Example	Education Cess, Road Cess (Fuel Cess), Infrastructure Cess, Clean Energy Cess, Krishi Kalyan Cess, Swachh Bharat Cess	Surcharge on Personal Income Tax, Corporate Tax	Income Tax