Cess and Surcharge
Cess and Surcharge
Context
In the 2025-26 fiscal cycle, a significant debate has emerged regarding "fiscal federalism" in India. State governments have raised concerns over the Central Government's increasing reliance on Cess and Surcharge to raise revenue. Because these levies are excluded from the "Divisible Pool," states argue that their effective share of national tax revenue is shrinking, despite the official devolution targets set by the Finance Commission.
The Federal Conflict: Shrinking Divisible Pool
The core of the grievance lies in how tax money is categorized and distributed between the Union and the States.
- The Divisible Pool: This refers to the portion of Gross Tax Revenue (GTR) that the Center is constitutionally mandated to share with States. Currently, based on the 15th Finance Commission recommendations, this share is 41%.
- The "Loophole": Under Article 270 (as amended by the 80th Amendment Act, 2000), Cesses and Surcharges are explicitly excluded from this pool. The Center retains 100% of these collections.
- The Trend: Data indicates that the share of Cess and Surcharge in the Center's GTR has risen from approx. 5.9% (2015-16) to an estimated 10.8% - 11% (2025-26). This reduces the "actual" effective devolution to states to nearly 30-31%, well below the nominal 41%.
Definitions & Key Differences
While both are "taxes on top of taxes," they serve distinct legal and fiscal purposes:
|
Feature |
Cess |
Surcharge |
|
Legal Basis |
Article 270 |
Article 271 |
|
Purpose |
Specific: Must be used for a designated cause (e.g., Education, Health, Swachh Bharat). |
General: Can be used for any government expenditure or to reduce fiscal deficit. |
|
Target Group |
Generally applied to all taxpayers or specific goods (like fuel). |
Targeted at high-income groups or profitable corporations (Progressive). |
|
Accountability |
Funds must be transferred to a specific Reserve Fund (e.g., Prarambhik Shiksha Kosh). |
Credited directly to the Consolidated Fund of India for general use. |
|
Sharing |
Not shared with States. |
Not shared with States. |
Current Issues & Observations
1. Lack of Transparency (CAG Findings):
The Comptroller and Auditor General (CAG) has frequently observed that billions of rupees collected as Cess are often not transferred to their designated reserve funds. For instance, between FY20-22, nearly ₹2.19 lakh crore of cess collections remained in the Consolidated Fund instead of being utilized for their specific purposes (like oil industry development or research).
2. State Demands for 2026-27:
As the 16th Finance Commission (chaired by Arvind Panagariya) prepares its roadmap for 2026-2031, many states are demanding:
- A cap on the total percentage of GTR that can be raised via Cess and Surcharge.
- Inclusion of these levies in the Divisible Pool if they exceed a certain threshold (e.g., 10% of total revenue).
- A "Sunset Clause" to ensure cesses are abolished once their specific objective is met.
Conclusion
The use of Cess and Surcharge has become a double-edged sword: while it provides the Union government with the fiscal flexibility to fund national priorities and manage deficits, it strains the "Cooperative Federalism" model by limiting the resources available to States for local development (Health, Education, Agriculture).