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Following article on” Understanding CESS” is part of our series on general awareness:
Cess is a form of payment which is imposed on public for accomplishing a particularly defined task. For instance, Road cess is imposed on Petrol/diesel to fund the National Highway Development Project; education cess is imposed on all indirect taxes to fund the cost of universalization of education.
Therefore, the cess is also known as an earmarked tax It is different from tax in such a manner that while imposing tax, the government never defines the avenues in which the proceeds of a particular tax will be spend. As indirect taxes are of two types viz. Ad valorem and specific duty, cess can also be ad valorem or specific where former is imposed on the basis of specific attributes of a commodity like weight, size, volume, length etc.
The Road cess in India imposed on sale of High Speed Diesels and petrol comes under this category as government collects Rs2 on every litre of fuel sold. The education cess is Ad valorem in nature as it is imposed on the value of tax. For instance, if indirect tax estimation of a commodity is Rs1000, then 2 percent education cess means Rs20 which depends on the value of tax but not on the specific attributes of the commodity or services.
Another quality of road cess is that it is based on the benefit approach of tax theory according to which, tax/cess is collected by those who will use the services. Since most of the vehicles in all likelihood ply on National highways, the disadvantage suffered by them in paying the tax is compensated by the benefit derived by plying on good roads in the form of saving of time and fuel among others. In the 11th plan (2007-12), the Government is estimated to have collected Rs 38,771 crore as road cess and Rs 54,898 crore should be generated through road cess in the 12th plan to meet the huge funding requirement of central road projects.
Recently, a Working Group on Urban Transport headed by former Delhi Metro chief E Sreedharan suggested that to generate resources for public transport projects, a green surcharge of Rs 2 per litre on petrol, a green cess of 3 per cent of the annual insured value of all private vehicles, and a urban transport tax on purchase of new cars and two-wheelers at 7.5 per cent of the total cost of petrol vehicles and 20 per cent in case of personal diesel cars may be levied. Since all these proposed charges are aimed at particular goal, they can also be kept under the category of cess.
Education cess was introduced in 2004, when the Central Government levied a 2% education cess on practically all the major central taxes. Reportedly, an estimated amount of Rs 60,000 crores has been collected till December 2011. Prarambhik Shiksha Kosh (PSK) has been established since November 2005 as a dedicated non-lapsable fund to receive the proceeds of the cess.
Education Cess is not a part of the net proceeds of the divisible pool of sharable taxes based on constitutional provisions and as per the recommendations of the Twelfth Finance Commission, the proceeds of Education Cess credited into a non-lapsable fund called Prarambhik Shiksha Kosh (PSK) are utilized exclusively for Sarva Shiksha Abhiyan (SSA) and Mid-Day Meal (MDM) Scheme.
Expenditure on SSA and MDM Scheme is incurred from PSK after the funds provided by way of Gross Budgetary Support (GBS) are fully utilized. No specific allocation is made separately to States/UTs against the amount collected through Education Cess. Assistance under PSK is released to States/UTs as per the schematic pattern and budgetary allocation for SSA and MDM Scheme.
The 1% secondary and higher education cess was introduced in Budget 2007-08 to fund secondary and higher education as well as for the expansion of capacity by 54% for reservation for socially and educationally backward classes.
However, education cess is criticized because its utilization is unclear. There is no accountability about how the education cess has been used. The irony is that neither Ministry of Finance nor HRD are coming out with one clear figure. The total amount of cess collected seems to vary as per the estimates of both the ministries.
There are other cesses also imposed by state and local governments also like coal cess, water cess, Solid waste management cess etc to ensure supply of clean water and proper waste disposal in the city.
The advantage of cess over tax is that former has a clear direction regarding the development activities for which it must be spent and thus the authorities are more accountable for proper utilization of cess proceeds but such accountability is lacking particularly in case of education cess in India.
Further, when the fundamental purpose of government revenue from all sources of taxes on income, sales, excise etc is to fund development expenditure & then the need of cess to fund the spending on basic education, public health and basic infrastructure means that primary revenue has been diverted to non-development avenues.