Cess excess: How India’s states remain deprived of what revenue Centre collects

Collection of cesses, surcharges strong tool for central govt to generate revenue, but at cost of states’ share

By Kundan Pandey
Published: Wednesday 29 January 2020
Cesses and surcharges collected by Government of India affect states' finances. Photo: Getty Images

The Narendra Modi government may pat its own back for promoting ‘cooperative federalism’, but when it comes to sharing revenue with states it seems to be a different story — going by its fondnessfor cesses and surcharges.

The central government in 2015 accepted the fourteenth finance commission’s recommendation to increase states’ share in the divisible pool of revenue to 42 per cent from 32 per cent. But even in 2019-20, what states will receive is hardly 35.7 per cent of the Centre’s tax receipts.

This is because an increase in cesses and surcharges collected by the Centre from 2016-17. Cess and surcharge collection, by the government’s budget estimates, would be 13.3 per cent in the current year (’19-20) — more than double the 6 per cent it used to be in ’13-14.

This does not include the goods and service tax (GST) cess collected by the union government to compensate states in case of any significant revenue loss from its implementation. Adding the GST cess will take the share of cesses and surcharges in the central tax pool to 17.8 per cent.

Had such cesses and surcharges been part of the divisible pool, they could have added five percentage points to states’ finances, according State of State Finances, a report by non-profit PRS Legislative Research.

The Centre has estimated to collect Rs 3,69,111 crore through cesses and surcharges this financial year.  Had this been in the divisible pool, states’ shares would have shored up considerably — up to 10 per cent, for example, in the case of Arunachal Pradesh.

Even for bigger states such as Uttar Pradesh, West Bengal and Bihar, the figure would have been 7-8 per cent.

The collection of cesses and surcharges has increased significantly in the last four decades: Their share in the Centre’s gross tax revenue was just 2.3 per cent in 1980-81, the report pointed out.

Article 270 of the Constitution details taxes that form the divisible pool. As it does not include cesses or surcharges levied by the Centre, those are not shared with the states.

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