JUNE 07, 2016

By V Sivasubramanian

THE present Government seems to have a special liking for raising large revenues to fund its pet sectors through new cesses! In his first full budget (2015-16), the Finance Minister (FM) imposed the Swachh Bharat Cess (SBC). In his second full budget (2016-17) he has levied two more cesses- Krishi Kalyan Cess (KKC) and Infrastructure Cess (IC)! Are there anymore cesses in the offing?

It may be recalled that in the last budget (2015-16)he had subsumed the Education Cess (EC) and the Secondary and Higher Education Cess (SHE) in the central excise duty and service tax on the grounds of movement towards the Goods and Services Tax (GST). GST, which is on the anvil, is expected to subsume all Central surcharges and cesses in so far as they relate to supply of goods and services! In this year's budget 13 small cesses (collection less than Rs. 50 crores in a year) levied by various Ministries have been abolished only on the grounds of reducing multiplicity taxes, associated cascading and the cost of collection.

A rational actor would see a policy disconnect as the convergence argument taken for education cesses would apply equally for other cesses as well. Having taken this policy position, it was at least not expected of the FM to levy new cesses which add to the number of levies! In fact, multiplicity of taxes and cascading effect are among the important reasons cited for moving towards a GST!

It was always open to the FM to merely increase the rates of service tax or central excise to raise the additional revenues needed to fund the specific expenditure items instead of levying new cesses.

As far as the taxpayer is concerned, every new levy impacts his ease of doing business in India. Besides the input credit restrictions (for example, credit of KKC is allowed only to pay KKC and no other credit can be utilized to pay KKC) which impose a disproportion burden, the taxpayer will also need to maintain separate accounts, make separate payments and add new line items in the invoice for the new levy. The IT system of the taxpayer will require rejig, many contracts may require renegotiation and there could be other legal implications for the taxpayer such as the point of taxation for the new levy, etc. Being an indirect tax, the additional levy and the increased cost will naturally get passed on to the ultimate customer!

But then policy making does not always go by the rational actor model. Generally speaking, a cess is also a tax imposed for some specific purpose. Cesses generate dedicated revenue streams which are pre-approved by Parliament to be earmarked for specified purposes. The proceeds from the cesses are credited to dedicated Funds in the Public Account of India and remain non-lapsable unlike in the case of normal budgetary allocations from the Consolidated Fund of India (CFI) which lapse at the end of the financial year.

Here we may note that even these cess receipts have been mandated to be first credited to the CFI and only after due appropriation made by Parliament by law, utilized for the specified purposes. So it can be argued that the Parliament still technically retains its discretion to reallocate the cess revenues, if necessary, to other more deserving causes.

But such non-lapsable dedicated revenue streams enable Government Agencies to leverage and raise further funds from the market to finance large projects in the specified sectors and also to advance execution of projects in these sectors. A classic example of this is the Road Cess (introduced first in 1998) which has enabled the National Highways Authority of India (NHAI) to take up several Phases of the National Highways Development Project at the same time by augmenting its resources though market borrowings and public private partnerships (PPPs).

However, for best outcomes, it is important that a shelf of bankable projects which are to be funded by such revenues are also developed in parallel coupled with institutional and regulatory structures in respect of such projects.

It is also important that the dedicated revenue streams are not short lived as would happen if the cesses were to be subsumed in the GST. So the new cesses like SBC and KKC may require to be continued even after implementation of GST. But will this not be inconsistent if these cesses are supposed to be subsumed in the GST? So there is a policy disconnect here as well!To be noted here is that the non-subsumption of cesses, if any, will directly impact the Revenue Neutral Rate (RNR) of GST!

But I also have another major concern in the policy disconnect between the levy of new cesses and the devolution of tax revenues to the States. Article 270 of the Constitution provides for distribution of taxes and duties referred to in the Union List on the basis of the Finance Commission recommendations. However this distribution pool inter alia excludes surcharges for the purposes of the Union and cesses levied for specific purposes under any law made by the Parliament.

The Fourteenth Finance Commission (FFC) recommended a huge jump in the States' share of the Union Tax proceeds (net) to 42% from 32% recommended by the Thirteenth Finance Commission. The consequence of this much greater devolution is that the fiscal space of the Centre would reduce in the same proportion. FFC basically expected the number of Centrally Sponsored Schemes (CSSs) to reduce and be replaced by greater devolution of taxes.

The present Government (read FM) took a high policy pedestal of cooperative federalism while accepting the largest ever change in percentage of devolution to the States as recommended by FFC. The Hon'ble Prime Minister of India (PM) also wrote to all the States about the record increase in the devolution of resources to States inter alia mentioning that "This is all towards the fulfilment of my promise of co-operative federalism. As you have already seen, we have decided to involve states in discussing and planning national priorities. This is being done so as to maximise the outcome from every rupee spent either at the centre or the state."

The greater devolution to the States has been repeatedly highlighted both by the PM and the FM on several subsequent occasions as well. In a recent public function,thePMwent on to highlight that as against the earlier practice of the States getting only 35% of total funds of the Centre, they now get 65%!

When the policy thrust is towards cooperative federalism where the States are to get a greater share of the Centre's tax revenues, I find that the levy of more and more of cesses which only generate exclusive revenue streams for the Centregoes against this thrust. By levy of several new cesses such as SBC, KKC and IC, the spirit of cooperative federalism may be getting violated as levy of every additional cess reduces the States' share from the overall tax revenues collected by the Centre! Clearly the number of CSSs are also on the rise!

Is it a case of the Government working in silos without an overall policy thrust? Hope the FM listens to himself as well!

(The author is a former civil servant, currently practicing as Director with Lakshmikumaran & Sridharan. Views expressed are personal.)