Digging into the Cesspool

Barely two months after the Comptroller and Auditor General (CAG) of India released a scathing report questioning the utility of cesses, the Central government introduced two more to a list of dozen existing cesses in Budget 2016. The Centre hopes to mop up Rs 8,000 crore from Krishi Kalyan Cess and Infrastructure Cess, and an additional Rs 13,500 crore from clean energy cess, or the Clean Environment Cess. Further, the government hopes to collect Rs 1.7 lakh crore, a whopping 15.7 per cent of the government's share of tax revenues of Rs 10.54 lakh crore, from its entire cess pool in 2016/17.

According to the 14th Finance Commission tax formula, the Centre was mandated to compensate the states with a higher percentage devolution from the Central tax pool - from the earlier 32 per cent to 42 per cent now, leaving it with no option but to share an additional Rs 1.40 lakh crore tax revenues with the states. Therefore, to increase its share of revenues, the Centre decided to make the most of the cess regime, because money collected through cesses is not shared with the states.

However, the move has raised many eyebrows. Says Sunil Kumar Sinha, Principal Economist, India Ratings: "Money collected through many cesses do not have designated pools, and we do not know if they are actually spent for the purpose they were collected for." The CAG, in its report released in December, had also echoed similar views, pointing out that in some cases, even the CAG couldn't figure out what was happening to the unutilised funds. For instance, for the Rs 64,000 crore collected through the Secondary and Higher Education Cess between 2006 and 2015, "neither a fund was designated to deposit the proceeds of the cess nor schemes (were) identified on which the cess proceeds were to be spent", the CAG had observed.

Economist Omkar Goswami, who is the Chairperson of Corporate and Economic Research Group Advisory, explains: "I truly disagree, except in rare instances, of using cesses for raising money. If it is for a specific purpose - petrol and diesel cess for highway - I can live with it. But I disagree with it because it is an apparatus that is used not to share revenue with the states."

The government, however, seems oblivious to all the criticism. It is going ahead with its plans to raise Rs 5,000 crore through the 0.5 per cent Krishi Kalyan cess on all taxable services. With the 1 per cent infrastructure cess on small petrol, LPG, CNG cars, 2.5 per cent on small diesel cars, and 4 per cent on higher capacity vehicles and SUVs, the government plans to raise another Rs 3,000 crore. It had also levied a 0.5 per cent Swachh Bharat cess on all taxable services in November - it is estimated to collect Rs 3,750 crore this year and, in 2016/17, it is likely to mop up Rs 10,000 crore.

The Krishi Kalyan cess will be used for financing initiatives related to improvement of agriculture and welfare of farmers, while the infrastructure cess will be used on infra projects. Swachh Bharat cess would be spent on the PM's pet project to clean up India.

Now that the Centre has made up its mind, we will probably have to wait for the CAG report of 2017 to know whether the government lived up to its promise and used the cesses for the purpose they were levied for. Till then, we will have to give it the benefit of doubt because it certainly needs funds to bolster the economy.