Flagging Cess Non-Transfer, its Economic Impact

Context: The Comptroller and Auditor General’s (C&AG’s) observations in its Financial Audit Report 2020 has raised significant issues of a lack of transparency and propriety.

Levying of Cesses in India:

• There are as many as 35 cesses levied by the government of India: These are earmarked taxes and the proceeds are used for the purposes for which they are levied. 

• Ostensible reasoning for levying these cesses: The belief that ring-fencing of revenue for specified priority purposes may evoke greater tax compliance as people can link the benefits with taxes paid.

• A number of reserve funds or development boards are created for these speci?ed purposes and the collections from the cesses are supposed to be transferred to these funds placed in public accounts.
• They are not a part of the Consolidated Fund of India (CFI) and can not be used for defraying regular expenses. 
• The transactions in public accounts are supposed to be done by the government as a trustee or a banker and are not subject to vote by Parliament. 

• Inter-governmental Fiscal Arrangements: (between the Centre and the states)

• Article 270 of the Constitution requires the Union government to distribute the proceeds from all Central taxes listed in the Union List based on the recommendation of the Finance Commission.
• Article 271 excludes the distribution of the revenue from any surcharge or cess levied by the Union government for any speci?ed purpose. 

Overview of Findings of the C&AG report: Lack of government’s transfer of funds

• The C&AG’s report stated that the Government of India had retained a total of ?47,272 crores in the CFI due to non-transfer of compensation cess revenue.

• The report also alluded to the non-apportionment of a portion of Integrated Goods and Service Tax (IGST) among the States and retaining it in the CFI. 

• Defraying of regular expenses: 

• There was a ?1.11 lakh crore short transfer from 35 Cesses to the public accounts during 2018-19.
• There was a ?47,272 crore short transfers to the GST Compensation Cess Fund.
• There was short payment of ?38,000 crores in the transfer of the road cess to the Central Road and Infrastructure Fund.
• The government had also collected ?1,24,399 crore from the cess on crude oil which, as required, was not transferred to the Oil Industry Development Board (the designated Reserve Fund).

• Obfuscating the Budget: to show lower revenue and fiscal deficit

• In addition to off Budget borrowings to cover fertilizer and food subsidy, the government-financed 

• Irrigation projects from the Long-Term Irrigation Fund (LTIF) created by the National Bank for Agriculture and Rural Development (NABARD), and 
• Railway projects through borrowings from the Indian Railway Finance Corporation (IRFC).

• By short transfer of the realized amount of cess to the respective funds and boards in Public Account, the government understated revenue and ?scal de?cits for the year which works out to be more than 1.2% of GDP.

Issues with the Cess Collections:

• Difficulty in prioritizing areas: when there are as many as 35 earmarked cesses, it is dif?cult to see all of them as priority areas requiring protection of funding. 

• Added complexities in the tax system and compliance costs.

• Opaque process: the operation of the cesses involving collections and transfer to designated funds in the Public Accounts makes the entire process opaque as the operation of these funds also needs to be monitored and audited. 

• Bypasses devolution under the Finance Commission (FC): The government takes the route of cesses since it sees the recommendations of the FC to be generous towards state:
• For, E.g. while the mandated devolution is pegged at 42%, almost all the discretionary increases in taxes were done by levying of cesses.
• The States’ share in the gross Central taxes was 35% in 2015-16, the ?rst year of the Fourteenth Finance Commission’s recommendation, but decreased to 32% in 2019-20.
• In 2020, it could be less than 30% as a large volume of revenue from petroleum products is sought to be raised through additional excise duties. 
• Rising collections from cesses: The cesses and surcharges constituted just about 3% of Central gross tax revenue in 2000-01; but in 2015-16, it was 16.5%. It could be as much as 20% in 2020-21.