Some states have complained to the 16th Finance Commission that the Centre is increasingly taking recourse to cess and surcharge to circumvent its recommendations on tax devolution.
- State’s Objections
- States argue that the Centre is increasingly relying on cess and surcharge to reduce the divisible pool of taxes, which is shared between the Union and states based on the Finance Commission’s recommendations.
- This strategy diminishes the funds allocated to states, impacting their financial resources.
- Southern states have emphasized the need to reward population control efforts by giving more weight to this criterion in tax distribution.
- They propose reverting to the 1971 Census for tax devolution calculations, as the use of the 2011 Census disadvantages states that successfully implemented population control measures.
Constitutional Basis:
- Article 270:
- Specifies that taxes and duties listed in the Union List, except for:
- Surcharge on taxes and duties (Article 271).
- Any cess levied for specific purposes under parliamentary laws.
- These exceptions (cess and surcharge) are excluded from the divisible pool of taxes shared with states.
- Specifies that taxes and duties listed in the Union List, except for:
- Cess and Surcharge:
- Cess:
- Levied for a specific purpose (e.g., Swachh Bharat Cess for cleanliness activities).
- Credited to the Consolidated Fund of India (CFI) and used only for its designated purpose after parliamentary approval.
- The Centre is not obligated to share cess proceeds with states.
- Surcharge:
- A tax on tax, typically levied on higher-income individuals (e.g., those earning above ₹50 lakh annually).
- Proceeds are added to the government’s general revenue pool and can be used for any purpose.
- Cess:
Distinctions Between Taxes, Cess, and Surcharge:
| Aspect | Taxes | Cess | Surcharge |
|---|---|---|---|
| Purpose | General government expenditure | Specific purpose (e.g., education cess, health) | General use by the Centre |
| Sharing with States | Shared between Union and states | Not necessarily shared | Not shared |
| Constitutional Provision | Article 270 | Article 270 (exemption clause) | Article 271 |
| Fund Allocation | Part of divisible pool | Credited to CFI, used for specific goals | Goes to Centre’s general fund |
