Recently, the Odisha chief minister pleaded with the Government of India for a share of the cess and surcharge collected by the Centre. This issue has also been raised in Parliament from time to time. As a part of division of power and responsibilities between the Union and states as prescribed in the Seventh Schedule under Article 246 of the Constitution, the Centre is empowered to levy and collect both direct and indirect taxes under the Union List. This, ab initio, has created a huge imbalance in resource mobilisation to the detriment of the states for meeting their committed social expenditure responsibilities.
As per the XV Finance Commission, states bear more than 62% of expenditure responsibilities but are given only 37% of revenue raising power, while the Union government owns 63% of revenue raising power to spend on 38% of its expenditure responsibilities. The Finance Commission, which is constituted under Article 280 of the Constitution to mitigate this imbalance, is assigned the responsibility of recommending the quantum of transfer of these taxes (net) to the states every five years, following objective and rational criteria in the best traditions of cooperative federalism. Such resource transfer is a “basic feature” of the federal structure. The net proceeds of taxes (called, net tax revenue) are obtained by excluding cesses and surcharges, cost of collection and transfer to the National Disaster Response Fund (NDRF) from the gross figures of tax revenue. Therefore, a higher pool size of cesses and surcharges diminishes the overall size of the divisible tax cake, thereby adversely affecting resource transfer to the states.
The constitutional scheme: A cess, imposed on the base tax liability of a corporation or individual taxpayer, is imposed for a specific purpose. A surcharge is a tax on tax and is imposed on the people covered in the tax base only. It can be used for any public purpose as decided by the Union government. Both the proceeds are not shared with the states, this being an exception under Article 270 of the Constitution.
Impact on shareable pool: Over the years, the Union government has made use of cesses and surcharges an additional revenue mobilisation measure. Their share as percentage of gross tax revenue has more than doubled, from 6.26% in 2010-11 to 16.89% in 2021-22 (Budget Estimate).
From 2010-11 to 2013-14, the Centre imposed 15 cesses and surcharges, which peaked to 25 in 2019-20. The introduction of GST has, however, subsumed many of these. During 2020-21 and 2021-22, nine are in operation. However, the levy on account of these nine cesses and surcharges is very high at Rs 3,72,971 crore during the years 2020-21 and 2021-22 as compared to average levy of Rs 1,10,180 crore during the years 2010-11 to 2019-20. This is mainly because of an increase in effective rate of road and infrastructure cess as additional duty of excise on motor spirit and high speed diesel oil. In 2018-19, Rs 51,266 crore was collected from this cess, which increased to Rs 2,24,000 crore in 2020-21. This cess is collected for the particular purpose of development and maintenance of roads.
Despite increase in cesses and surcharges from Rs 49,628.02 crore in 2010-11 to Rs 3,74,471.14 crore in 2021-22, the benefits do not flow down to the states as these are not included in the divisible pool, which is net of taxes. As a result, the total divisible pool is itself declining over the years as a percentage of gross tax revenue. Although a higher devolution to states was recommended by the XIV Finance Commission (2015-2020) from 32% to 42%, the actual devolution to states (as % of gross tax revenue) remained at 34% during the said period. Similarly, the XV Finance Commission (2021-2026) recommended devolution to states at 41%. However, again in FY 2021-21 (B.E), the devolution to states (vertical transfers) has actually declined to 30% of gross tax revenue due to the cesses and surcharges in the total collection. If the entire cesses and surcharges projected in BE of 2021-22 are shared with the states as a part of the divisible pool in the same formula as prescribed by the XV Finance Commission, then the states would get an additional kitty of Rs 1,53,533 crore (41% of Rs 3,74,471 crore).
State’s demands: Over the years, states have been continuously demanding that the Union government either completely do away with cesses or if they are continued for a longer period, bring them into the divisible pool. By this inclusion, states will get a greater share of devolution from the Centre’s net proceeds in order to meet their own social, human development and infrastructure commitments. Further, the Comptroller and Auditor General of India has raised serious concerns over misutilisation of cesses with only a part being spent for the particular purpose for which they were levied; the rest were diverted for other purposes. The fourteenth and fifteenth Finance Commission had recommended that revenues from cesses and surcharges should be a part of the divisible pool, by bringing about a constitutional amendment.
Conclusion: During this pandemic, it is the states that are at the forefront of testing, tracing and treatment protocol from end to end. As a result, the states are running out of resources and heading for a fiscal crisis. The average tax to GSDP ratio of all states has declined to 5.8% in 2020-21 from 6.3% in 2019-20. Besides, the average interest burden ratio for all states, measured by interest payment as percentage of revenue receipts, has increased to 14.8% in 2020-21 from 12.7% in 2019-20. As a result, the average revenue deficit ratio for all states has worsened to (-) 2.9% in 2020-21 from (-) 0.08% in 2019-20. Since the states are constrained to generate new resources, it is imperative that the Centre brings in a constitutional amendment to bring cesses and surcharges to the divisible pool. The current Covid crisis provides the perfect backdrop for moving ahead.
(Views are personal)
Amar Patnaik, BJD Rajya Sabha MP, ex-CAG bureaucrat with a PhD in management and now an advocate (amar_patnaik @yahoo.com)