Cess Meaning - What is Cess?

• An earmarked tax that is collected for a specific purpose and which must be spent only for that specific purpose and not any other purpose is known as a Cess.
• Only after a legislation is framed and passed in the Parliament of India, a cess can be collected by the Union Government.
• The legislation has to be clear on the purpose for which those funds are raised.
• Union Government must share taxes with the State Government, but a cess can be omitted from those divisible pool of taxes as per the provisions given in Article 270 of the Constitution of India.
• The Union Government has the power to earn revenue through direct taxes, indirect taxes, fees, surcharges and cess.
• The revenue earned by the Union Government through indirect tax such as Goods and Services Tax (GST) and through direct tax such as income tax; can be spent in any manner by the Government, for any purpose which might help the public.
• Whereas the money earned through cess has to be spent for that specific purpose and it cannot be spent for anything else. For example, the money earned from infrastructure cess has to be spent on infrastructure and cannot be spent on any other purpose.

Cess in India – A Brief Background

• Since 1944, at various points in time, 42 cesses have been levied.
• The above mentioned numbers were given in one of the reports which was submitted to the Fifteenth Finance Commission.
• As per this study, the first cess was levied on matches.
• After independence, the cesses levied were focused on development of particular industries. Couple of examples are salt cess and tea cess which were levied in 1953.
• Later on, the cesses levied were focused on welfare of the labourers. It resulted in levying of cine workers welfare cess in 1981, limestone and dolomite mines labour welfare cess levied from 1972, and the iron ore mines labour welfare cess in 1961.

Introduction of Goods and Services Tax (GST) – Removal of Many Cess in India

• Most of the cess in India was removed after the introduction of GST in 2017.
• The number of cess in India which was continued to be levied came down to just seven, as of August 2018.

Types of Cess in India

In the Finance Bill for 2020-21, Health Cess of 5% on imported medical devices was introduced by Finance Minister Nirmala Sitharaman. Post GST, the different types of cess which continued to be levied in India are listed below:

• GST Compensation Cess
• National Calamity Contingent Duty on Tobacco and Tobacco Products
• Building and Other Construction Workers Welfare Cess
• Road and Infrastructure Cess
• Health and Education Cess
• Cess on Crude Oil
• Cess on Exports

Comptroller and Auditor General (CAG) – Report on Cess

• In the very first two years of the implementation of the new GST, instead of crediting ₹47,272 crore of GST compensation cess in the GST compensation fund, it was retained in Consolidated fund by the Central Government.
• This was necessary to be transferred because the main purpose of levying this particular cess was to compensate the loss of revenue incurred by the States when they gave up their powers of levying indirect taxes by joining the GST regime.
• The CAG also found that the Centre did not transfer the amount of around Rs 1.24 lakh crores to the designated reserve fund – the Oil Industry Development Board, this amount was retained by the Centre. This was earned by levying Cess on Crude Oil over the last decade.