As pointed out by the nation’s top auditor, there are irregularities galore in the management of the various cesses as they have been appropriated to manage deficits
Reining in the fiscal deficit has always been a challenge for the Centre especially after the enactment of the Fiscal Responsibility and Budget Management (FRBM) Act, 2003, which requires it to maintain the shortfall within a specified threshold. At the same time, there are certain thrust areas, such as education, roads and other infrastructure, telecommunication networks in rural areas, exploration of oil, gas and so on, which the Government feels won’t get the desired funds in the normal course of budgeting. This led to successive dispensations to think of a special tax or cess — a form of tax charged/levied over and above the base tax liability of a taxpayer. These include USO (Universal Service Obligation) levy imposed on telecom service providers, cess on Crude Petroleum Oil (CPO), Road and Infrastructure Cess (RaIC), Primary Education cess (PEC), Secondary and Higher Education cess (SHEC), Education cess on Imported Goods (ECIG), R&D cess and so on. The proceeds from these taxes are credited to the Consolidated Fund of India (CFI) and subsequently transferred to a non-lapsable fund, for instance, the USO Fund (USOF) — based on the appropriation approved by the Parliament — created in the public account for utilising exclusively for the purposes for which it is collected. The financing of the specified activity thus gets shielded from the vulnerabilities associated with the normal budgeting exercise.
Prima facie, the idea sounds appealing. But the big question is if this is working. Are funds being utilised for the declared purpose? Are the outcomes commensurate with the intent? To answer these questions, let us look at the reports of the Comptroller and Auditor-General of India (CAG) brought out from time to time. The Centre charges licence fee at eight per cent of the adjusted gross revenue (AGR) of telecom service providers. This includes five per cent as appropriation for crediting to USOF (set up in 2002) while the balance three per cent is retained with the general exchequer. For 2018-19, the CAG has noted that out of a total collection of about Rs 6,900 crore as USO levy, only Rs 4,800 crore was transferred to the USOF, implying a shortfall of Rs 2,100 crore. Against a collection of Rs 1,10,000 crore since 2002, the amount disbursed till date is only Rs 54,500 crore. The balance Rs 55,500 crore remains with the CFI. Coming to the SHEC, the Government started collecting this levy from 2006-07 and until January 2019, could harness about Rs 94,000 crore. The entire amount has been retained in the CFI. In this case, even the public account christened as Madhyamik and Uchchtar Shiksha Kosh (MUSK) was created only in August 2017 (more than a decade after the collection started) and has not been operationalised so far.
The R&D Cess Act, 1986, provides for levy and collection of cess on all payments made for the import of technology. The proceeds of this were to be disbursed as grants-in-aid to the Technology Development Board (TDB) set up in 1996. During 1996-97 to 2017-18, a total of about Rs 8,000 crore was collected. Of this, a mere Rs 800 crore was transferred to the TDB. Furthermore, though the cess was abolished from April 2017, it continued to be collected during the following two years, viz. 2017-18 and 2018-19. In case of Clean Energy Cess (levied on coal supplies) since 2010-11, the amount denied to the designated fund, viz. National Clean Energy Fund (NCEF), was about Rs 44,500 crore. Likewise, in the case of the RaIC, (earlier nomenclature Road Cess), there was a “short transfer” of about Rs 72,000 crore in the amount collected since 1998-99 till March 31, 2018 to the Central Road Fund (CRF), the public account.
Unlike other taxes, which are part of the “divisible pool” to be shared with the States as per the recommendations of the Finance Commission, the Centre gets to retain all of the cess (which goes to the CFI and is available for general use). Because its finances have come under serious stress during the current pandemic year, its reliance on RaIC has increased by leaps and bounds. It raised central excise duty (CED) on petrol and diesel twice this year in March and May, mostly through hike in the cess. At present, out of CED on petrol of Rs 33 per litre, Rs 18 per litre or 54.5 per cent comes from the cess. For diesel, out of Rs 32 per litre CED, RaIC is Rs 12 per litre or 37.5 per cent. The Government also levies the Oil Industry Development (OID) cess currently at 20 per cent ad-valorem on the price that domestic producers of crude, namely the Oil and Natural Gas Corporation (ONGC) and the Oil India Limited (OIL), get on their supplies from nominated blocks and pre-NELP (new exploration licensing policy) exploratory blocks. Collected under the Oil Industries (Development) Act of 1974, though the cess proceeds are intended to fund research, exploration and development work, yet the money remains with the CFI.
As pointed out by the top auditor, there are irregularities galore in the management of the cesses. These include short or “nil” transfer of cess proceeds from the CFI to the dedicated non-lapsable fund in the public account set up for the specified purpose. In certain cases, the public accounts were not even created long after the Government started collecting the tax. In others, it continued to collect even after the same was abolished. The Government has, in fact, used them primarily for increasing its “general revenue” and meeting the fiscal deficit target. If an overwhelming share of proceeds (or even the whole of it) from the cess remain with the CFI, what else one should conclude? Or the dedicated public account where the money has to go (for use in the intended purpose) is not even created, what else can one infer?
Meanwhile, these cesses continue to inflict damage on the stakeholders who bear their brunt. Look at the impact of the five per cent USO levy on telecom service providers. In an intensely competitive environment, wherein they are compelled to keep the tariff low (this is also in sync with the dire need to make these affordable to consumers, with a majority of them having a low income), such levy has the effect of raising the cost of services and making them unviable. In fact, there is a strong case for scrapping this tariff.
This was recognised by none other than the Union Telecom Minister, Ravi Shankar Prasad, when he wrote to the Finance Ministry: “Given that rural tele-density has significantly increased since the time the fund was set up, it is proposed that the USO levy may be reduced from five per cent to three per cent. The two per cent USO levy reduction may be made available to the telecom service providers provided that this amount is utilised by them for carrying out research and development for development and deployment of indigenous technologies in the country.” Yet the Government continues with status quo, the sole reason being easy availability of funds (from USO levy) which can be used for plugging its general deficit. Look at the RaIC, which accounts for a major slice of the CED on petrol and diesel and together with the cascading effect of Value Added Tax (VAT) leads to a bizarre situation whereby taxes alone account for about two-third of their prices at the pump. The high fuel price contributes to high inflation and higher cost of fertilisers and food. Since the Government controls their prices at a low level to make them affordable, much of the extra revenue is given back as higher subsidy.
To that extent, the revenue gain from the cess (besides other taxes) is imaginary. Likewise, 20 per cent OID cess on domestic supplies of crude (besides the 20 per cent royalty ONGC/OIL need to pay to State Governments in respect of onshore supplies and 10-12.5 per cent royalty to the Centre on offshore supplies) impacts the viability of producers at a time when their realisation from sale has plummeted (courtesy, the steep decline in the international price of crude).
Despite the cesses not serving the intended purpose and their negative consequences, the mandarins in the Finance Ministry appear to be in no mood to say goodbye to them. Amid the current crisis created by the pandemic, when the tax collections have been severely impacted and expenditure commitments have ballooned, they may not even entertain any discussion on this. Nonetheless, there is dire need to put abolition of these cesses on the high table as these are not only counter-productive but also make our policy planners and administrators complacent with regard to sustainable ways of balancing the budget. Will the Government go on a course correction? One can only wait and watch.
(The writer is a New Delhi-based policy analyst)
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