FEBRUARY 03, 2010

Budget should draw curtains over all cesses and surcharges

By TIOL Edit Team

CESS and surcharges have become synonymous with the reforms. Whenever there is talk of reforms, the idea of levying a special cess to fund the reforms crops up. And the cess proposals gain acceleration in the few months preceding the Union or State budgets.

The situation in the current year is no different. The Finance Ministry has to be, however, on the guard as it is pilot major tax reforms through direct tax code and goods service tax (GST).

The Law Ministry's draft judicial reforms blueprint reportedly moots legal reforms cess to raise funds for clearing three crore of pending cases. The cess would be pattern on the lines of education cess. The latter was introduced as 2% cess on all central taxes to fund primary education in the 2004-05 budget.

The other day Supreme Court reportedly proposed levy of appropriate cess or surcharge on the price of petrol and diesel to create a special fund for compensating hit-and-run accident victims where the identity of offending vehicle is not established. Alternatively, vehicle insurance policies should be amended appropriately.

The other cess and surcharge proposals emanating from different sectors including expert committees include affordable housing cess for the benefit of homeless poor, green cess for funding renewable energy projects, cess on coal price to fund renewables, eco tax on coal and cars and climate change tax on polluters.

The railways has proposed a new cess to raise project finance. It already levies all sort of imposts that include safety surcharge, development charge, congestion charge, superfast train surcharge. It is another matter that Railways neither provide safety nor speed, leave aside improved services.

Railways and lately privatized airports are classical example of gross abuse of monopoly powers to fleece consumers through unwarranted imposts.

Experience shows that sector or issue-specific cess and surcharges are either misused or are under-utilized by central, state and local authorities.

Take the case of Building and Other Construction Workers Welfare Cess Act, 1996.

Of the Rs 1998 crore cess collected by states as on 30 June 2009, only Rs 384 crore has been spent on construction workers welfare. The lion's share of fund is thus lying unutilized. Under this law, governments collect cess @1% of the cost of construction incurred by the employer.

The objective of this cess fund is to provide immediate assistance workers injured during construction, pensions after age of 60 years, housing loans, the premium for group insurance scheme, assistance for educating workers' children, medical expenses, etc.

The levy of education cess has hardly made any difference in primary education if horror stories that periodically hit the headlines are any indication.

A Comptroller and Auditor General report on Bihar for 2004-05 noted that Rs 8.84 crore health and education cess levied under Bihar Health Cess Rules and Bihar Primary Education Rules was unauthorisedly utilised by urban local bodies for payment of staff salary instead of depositing the same to government account.

Stories about sector-specific cess failing to achieve the objective are aplenty. Take the case of 2% special customs duty on all imports that was levied under 1996-97 to finance development of export-import infrastructure especially ports and was discontinued after a few years.

How much money was collected? How of which went to the ports? Any record? Who cares?

Has the Government ever disclosed where thousands of crores collected as cess on domestic crude oil since 1974 been diverted? Only a minute fraction of this money was utilized for the intended purpose of development of hydrocarbons and downstream sectors.

It is obvious that cess and surcharges are levied by the Government to improve its overall financial situation. It is an emotional blackmailing of the public because new imposts such as education cess are levied ostensibly for the welfare of poop people and for national development.

Each and every cess and surcharge is actually an indicator of failure of the State to effectively utilize tax and non-tax revenue collected year after year and ensure rational distribution of budgetary resources across all segments of the economy and society.

It is needless to point out that add-on imposts have made a mockery of fiscal reforms over the years.

There is, however, a ray of hope in the GST reforms. There is a thread of unanimity among the Centre, States and Finance Commission on the issue of subsuming of all central cess and surcharges in the central GST. Similarly, respective State cess and surcharges are to be subsumed in the State GST.

The Finance Minister Prannab Mukherjee should seize initiative and merge all central and surcharges into the respective indirect taxes without waiting for consensus on GST.

He should in fact go a step further and merge or abolish all cess and surcharges on central direct taxes.

The Direct Taxes Code Bill 2009 has provision for cess and surcharges. The bill should be revised to simply and make transparent the system of direct taxation.