Why in news
Arvind Panagariya, Chairman of the 16th Finance Commission, discussed the growing concerns of States regarding the Centre’s increasing use of cesses and surcharges.
What are Cess and Surcharges?
Cess and surcharges are levied by the Central government for the purposes of the Union under Article 271 of the Constitution of India.
A cess is a tax on tax. The Indian government levies it on the tax liability, including surcharge, and it is used for a specific purpose.
Cesses are named after the identified purpose; the purpose itself must be certain and for the public good.
Some different types of cesses levied in India are infrastructure cess on motor vehicles, Krishi Kalyan cess on service value, Swachch Bharat cess, education cess, and cess on crude oil, among others.
On the other hand, a surcharge is charged on the income taxes paid. It is usually paid by taxpayers, whether individuals, associations of persons, or companies, who fall in a particular tax bracket.
Surcharge is not collected for any specific purpose but can be used for any reason as seen reasonable by the Central government.
The proceeds collected from a surcharge and a cess levied by the union form part of the Consolidated Fund of India.
The funds need not be shared with the State governments and are thus at the exclusive disposal of the union government.
The proceeds of such surcharges and cesses go towards meeting certain specific needs, such as financing of centrally sponsored schemes.
The benefit of such expenditure also percolates to the states.
What are the concerns
States are concerned that cesses and surcharges collected by the Centre are not shared with them, despite their increasing share in the divisible tax pool.
The Centre’s growing reliance on cesses and surcharges reduces the fiscal resources available for States.
States demand that cesses and surcharges should be capped, with any additional revenue flowing into the divisible pool, which is shared between the Centre and States.
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