Cess- the Myopic Monetary Mess

The new decade has brought along enormous hope and optimism for a world standing strong amid a global pandemic. The Union Budget of 2021 too marked its beginning with the hope of recovery, both economically and socially. Starting the decade with a digital-only budget along with the concept of “Atmanirbharta”, the budget surely hosts many firsts. The Covid-19 pandemic has pushed many countries into economic stagnation, with the highest levels of unemployment and poverty seen in decades. These tough times call for comprehensive reforms in the fiscal policy of the government. In this direction finance minister Nirmala Sitharaman on Monday unveiled what is regarded as the “Politically boldest” and futuristically targeted budget which is without populist schemes to reduce fiscal stress.

The Agriculture Infrastructure and Development Cess (AIDC)

While bringing in some firsts, the government has decided to keep its practised culture of Cess & Surcharge intact. To ensure enhanced remuneration for farmers by pushing for better agricultural infrastructure, the FM in her budget speech introduced the imposition of an Agriculture Infrastructure and Development Cess (AIDC) on specified goods including alcoholic beverages, gold, silver, cotton, peas, apple, petrol, and diesel. The amount of cess varies depending upon the usage pattern. Whereas ₹2.5 per litre has been imposed on petrol and ₹4 per litre on diesel, 100% cess is levied on beverages both locally manufactured and imported ones. According to Finance Secretary AB Pandey, the government is expecting approximately ₹30,000 crores through the cess.

Cess, Constitution, and Cooperative Federalism

Cess is imposed as an additional tax besides the base tax liability to raise revenue for an earmarked purpose (generally a social welfare scheme). The constitution gives power under its seventh schedule to both Centre and States to Levy Cess, thus providing the basis for India to be called a Country with “Cooperative Federalism”. Article 270, however, allows cess levied by Central Government to be used exclusively by it in pursuance of the object of the cess. This means that cess collected by the Union Government does not form a part

of the divisible pool of funds attributable to the states.

Tracing the Growth Story

Cess has a long history of its application, traced to the pre-constitution era. Various cesses have been levied since independence to balance the wheels of development and welfare of the state. Today Cess forms nearly 18% of the Gross Total Revenue (GTR) of the country and has registered an Average Year- on-Year growth of 24.83% during 2013-19. This rate when compared to the stagnant growth rate of States’ share in Tax Collections indicates the situation to be widely skewed in favour of the Union Government.

Irregularities in the use of Cess fund

The amount collected through cess is kept in the Consolidated Fund of India, an account of the central government which holds all the receipts, expenditures, borrowings and lending by the government. To utilise the funds for the purpose stated, the government has to create a dedicated fund. This means as long as a dedicated fund is not created, the Cess proceeds remain unutilised. These provisions have led to a wide gap between imposition and utilisation of the Cess funds in India.

In the case of 'Prarambhik Shiksha Cess' and ‘Madhyamik and Uchatar Shiksha Cess' (for primary and high school education respectively), both got their dedicated funds after more than a decade of their inception. Similarly, State Governments have not even utilised 25% of the collected cess meant for the welfare of construction workers in the past 8 years. It is the utmost social injustice that the cumulative unutilised Education Cess fund exceeded the

expenditure on both school and higher education for the year 2017-18. Many such cesses see the same fate as these and raise some serious questions about the very purpose of their imposition.

In the current scenario where an umbrella approach is needed to stimulate stagnation among all three sectors, the amount collected through cess could help the economy to gain some strength. According to a government official from finance ministry who spoke to Bloomberg on the condition of anonymity, the transfer to a dedicated fund for the cess is needed to be done only if there is an expenditure requirement for the purpose for which the cess was levied. This turns out to be a legal loophole in the allocation of funds.

Similarly, concerns have been raised by successive Finance Commission reports. The 13th Finance Commission (2010) report recommended decreasing share of cess and surcharge in the Gross Tax Revenue, whereas the 14th Finance Commission (2015) Report recognised Cess levy as a factor depleting the divisible pool of funds.


The latest CAG report tabled in last parliamentary session has revealed that the Finance Ministry retained almost 40%, an amount equal to ₹1.1 lakh crores of cess collections in the Consolidated Fund of India. The same fate has been met by several other cess funds like Crude oil, Health and education cess, social welfare surcharge and GST cess collections. This leads to understating the fiscal deficit of the nation and hampers the motive of the cess fund. These instances indicate the need for the authorities to revive the very conscience of Cess.

The government took a bold step when it abolished 13 cesses while rolling out GST regime. But that is not enough. To uphold the integrity of fiscal federalism of the nation. The government must make hard choices. Firstly, the Comptroller and Auditor General (CAG) should conduct periodic reviews of cess collection in a top to bottom approach. Secondly, there should not be inordinate delays in the establishment of dedicated funds to transfer the

collected cess proceeds from the CFI, and thirdly cess should be transparent to citizens which would boost the morale of public just like “Bharat Ke Veer” initiative of Government where citizens can preview the process. Supplementary to this government should also publish an annual account of how these funds have been utilised.

In the words of Winston Churchill “We contend that for a nation to try to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle”, the authorities today need to honour their commitment towards "trust as helping hand for wealth creation" as highlighted in the last economic survey. For cess to smoothen the road of economic and social revitalisation, it needs a blend of trust, transparency and will of the State.

This article is written by Abdesh Kumar Jha and Aditya Gupta, students of law

at Faculty of Law, Delhi University.


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