In its report on the financial audit of accounts for 2017-18, the Comptroller and Auditor General of India [CAG] has pointed out deficiencies/irregularities in collecting cess and utilizing it for its intended purposes.
A cess is a tax on a tax and usually levied for a specific purpose. The funds raised in this manner are to be kept in the Consolidated Fund of India [CFI], before being transferred to dedicated accounts.
Prior to Goods and Services Tax [GST], over a dozen cess were levied. From July 1, 2017, major cess viz. Krishi Kalyan Cess [KKC], Swachh Bharat Cess [SBC], Clean Energy Cess [CEC] and Cess on Tea, Sugar and Jute etc were subsumed under GST. However, six other cess viz. Primary Education Cess [PEC], Secondary and Higher Education Cess [SHEC], Education Cess on Imported Goods [ECIG], Cess on Crude Petroleum Oil [CPO], Road Cess and NCCD on Tobacco and Tobacco Products and CPO continue to be levied.
The irregularities pointed out by CAG include short or ‘nil’ transfer of funds from the CFI to the dedicated non-lapsable fund in public account set up for the intended purpose. In certain cases, the accounts were not even created long after imposition of the tax. In others, Cess continued to be collected even after the same was abolished.
For instance, the union government started levying the Secondary and Higher Education Cess [SHEC] from 2006-07. Till date, a total of Rs 94,036 crore was collected under this head. The entire amount has been retained in the CFI even as the dedicated Fund viz. Madhyamik and Uchchtar Shiksha Kosh was created only in August 2017 which has not been operationalised so far.
The R&D Cess Act, 1986, provides for levy and collection of a Cess on all payments made for the import of technology. The proceeds of this Cess was to be disbursed as Grants-in-aid to Technology Development Board [TDB] set up in 1996. During 1996-97 to 2017-18, a total of Rs 8,077 crore was collected. Of this, only Rs 779 crore was transferred to TDB. Further, even as the Cess was abolished from April 2017, it continued to be collected during 2017-18/18-19.
There was “short transfer” of Rs 72,726 crore in Road Cess collected since 1998-99 to Central Road Fund [CRF] till March 31, 2018. Likewise, in case of clean energy cess [imposed primarily on coal produced in the country and imported] collected since 2010-11, the amount not transferred to the designated fund viz. National Clean Energy Fund [NCEF] was Rs 44,505 crore.
The CAG has pointed out these irregularities repeatedly in its audit reports even as successive governments have failed to take necessary remedial action. The national auditor has lamented at this aspect in its latest report.
The overarching rationale behind collecting Cess is to create a dedicated pool of resources to fund – in the required measure and on un-interrupted basis – to promote development in areas which have remained neglected for long and need sustained support. For instance, there is urgent need to give a boost to education [especially primary and secondary], clean energy, R&D, road infrastructure etc.
In the normal course, budgetary allocation for different sectors are decided keeping in mind the overall macro-economic situation during any given year which may not result in availability of required resources for areas requiring special thrust. In this backdrop, creation of dedicated fund with regular flow of resources via Cess comes handy in meeting the requirements on sustained basis.
As a procedural requirement though, the money garnered from Cess has to necessarily go to the CFI but, it is the responsibility of the centre to ensure that from there it gets transferred to the dedicated fund [to be created concurrently] for further prompt transmission to the organizations/institutions for intended purposes. But, as highlighted by CAG, this does not seem to be happening.
Successive governments have tended to believe that Cess funds are available for meeting general budgetary needs. Further, considering that unlike other taxes, the Cess money is not required to be shared with states adds to their irresponsible attitude in this regard. It is this mistaken belief that that has led them to indulge in short transfer and other irregularities.
As it is, the levy of a Cess is a retrograde step. Being a tax-on-tax, it leads to avoidable cost push eroding the competitiveness of our goods and services. It is out of sync with underlying philosophy of GST – a major reforms implemented by the Modi – government – to eliminate the cascading effect of taxes.
Though, some Cess were subsumed under GST, strangely others were retained and more introduced viz. ‘compensation cess’ or additional tax levied on demerit goods such as luxury cars, pan masala, tobacco, aerated water which fall in the highest slab attracting 28% purportedly to garner resources for compensating the states – vide the GST Compensation Fund – to make up for the potential loss in revenue under GST vis-à-vis the erstwhile regime.
One would have taken these negative consequences in stride if only proceeds of the Cess were utilized for the intended purpose. When, the purpose is not served, these are bound to prick. Another collateral damage is manifest in the finance ministry developing a cavalier attitude to managing finances of the centre. When, mammoth sums are available on a platter, why would it follow discipline?
True, the dispensation under Modi is doing its best to stick to fiscal consolidation road-map – despite spending massively on infrastructure projects and welfare schemes – the current scenario in regard to utilization of Cess can’t be allowed to continue. It could be catastrophic if a non-serious/callous regime happens to take charge of the new government.
Ideally, the government should completely do away with Cess and allocate resources to various areas/sectors from the general budget in a ‘transparent’ manner. If, it continues with the Cess then, it must ensure that there is no misuse or irregularity in the utilization of the proceeds from this levy – heeding CAG advice.