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In the Union budget 2018-19, the government has not made any change in income tax rate, but has made substantial changes in cess types and rates. During the financial year 2017-18, the Union Government abolished more than 20 types of cess and introduced GST compensation cess. In the current budget, it has introduced health and education cess at 4 percent, by combining with previous ‘education cess’ and ‘secondary and higher education cess’, and also, increased the rate of Road and Infrastructure Cess (Duty of Excise on Motor Spirit and High Speed Diesel Oil). Different types of cesses have been introduced continuously by previous UPA and current NDA governments at different times.

‘Cess’ is not a new concept in the Indian tax history, as it used to be levied by local bodies and then by State governments for any particular purpose. In India, we considered ‘cess’ as earmarked tax. Cess is different from other taxes for two different reasons. As mentioned, it is earmarked for any particular programme; and cess, in usual cases, is a non-sharable revenue receipts by Union government, there is no need to share with State governments. However, GST compensation cess has been imposed in order to compensate states due to the loss occurred to State governments by introducing GST.

Does the abolition of many cesses cause a reduction in tax revenue or not? Looking at the cess collection by the Union government, in 2007-08, the cess amount share upon total tax revenue was 3.83 percent and which is now at 11.77 percent in the 2018-19 budget estimates (BE). If we compare the figure with net tax revenue, cess share was 5.19 percent in 2007-08, which has increased to 18.06 percent in 2018-19 BE. Obviously one major and temporary increment has occurred due to introduction of GST compensation cess. However, excluding the estimated amount of collection through GST compensation cess in 2018-19, the share of cess collection upon gross tax revenue of Union government is 7.81 percent and out of net tax revenue the share is 11.98 percent; which are higher than previous years (Figure 1).


Figure 1: Cess share upon Tax Revenue of Union Government of India


                Source: Calculated from Union Finance Accounts (various years) and Union Budget 2018-19.
                Note: GSTCC: GST Compensation Cess; RE: Revised Estimates; BE: Budget Estimates
As mentioned, the amounts collected through cesses are not sharable with States as untied fund. However, Union government usually fund some centrally sponsored programme from the cess collection and part of the funds are shared with States as tied fund to spend on the said centrally sponsored programmes. Increasing the cess share, out of  the total tax revenue may have a negative impact upon fiscal federalism by curbing fiscal space of the State governments. 
In the current exercise, we have presented the example of education cess (both education cess and secondary and higher education cess) to get a reflection of the spending pattern from cess collection. As mentioned, cess and particularly education cess was introduced during the pre-Independence periods, by Mr. E.I. Howard in 1839, on his draft bill to enforce compulsory attendance in primary school. The lieutenant–Governor of the north–western provinces during 1843 to 1853, James Thomason levied cess on land revenue to finance education. Since the Independence, many states and local bodies used to collect education cess, e.g., Maharashtra, Gujarat etc. In the recent period, Union Government of India introduced education cess on corporation tax, income other than corporation tax, import duties, and service tax etc. at a rate of 2 percent for funding elementary education since the fiscal year 2004-05, and in the fiscal year 2007-08 additional 1 percent education cess has imposed to finance secondary and higher education. In the 2018-19 budgets, NDA government has merged education cess, along with secondary and higher education cess and introduced health and education cess with 4 percent upon the personal income tax and corporation tax. 
Till 2017-18, the collections from education cess are transferred to the Prarambhik Shiksha Kosh to partially fund Sarva Shiksha Abhiyan (SSA) and Mid-day Meal (MDM) schemes. And for the secondary and higher education cess Government has made Madhyamik and Uchchatar Shiksha Kosh (MUSK) on August 2017, to partially funded to Rashtriya Madhyamik Shiksha Abhiyan (RMSA), National Means-Cum-Merit Scholarship and National Scheme for Incentive to Girls for Secondary Education and for higher education, Rashtriya Uchchatar Shiksha Abhiyan (RUSA), Scholarship and National Mission on Teachers and Training and Interest subsidy and contribution for guarantee funds, scholarship for college & university schemes etc. Prior to that, government spent the collection on secondary and higher education cess as a part of gross budgetary support (GBS) to the Department of School Education & Literacy and Department of Higher Education. 
In table 1, we have presented proposed funding among major programmes on education from education and health cess collection in 2018-19 budgeted estimates. We can see that in the current BE, more than 60 percent of Union government’s expenditure (including transfer to states and UTs) for SSA and MDM are proposed to fund through education cess amount. Also, in case of secondary and higher education, list of programmes and amount met from MUSK has been presented in table 1. More than 80 percent of allocated amounts for 6 programmes are estimates to fund through MUSK and in case of funding towards Central Universities, IITs, NITs and UGC a relatively small share would be funded through MUSK. 
Table 1: Amount allocated from Education Cess under Different Programme

2018-19 BE

(Rs. in crore)

Share of

Total Allocation



Support from Prarambhik Shiksha Kosh (PSK)


Sarva Shiksha Abhiyan



National Programme of Mid-Day Meal in Schools



Total amount met from  Prarambhik Shiksha Kosh




Support from Madhyamik and Uchhatar Shiksha Kosh (MUSK)


Rashtriya Madhyamik Shiksha Abhiyan



Interest Subsidy and contribution for Guarantee Funds



Scholarship for College and University students



Pandit Madan Mohan Malviya National Mission on Teachers and Teaching



All India Council for Technical Education (AICTE)



Grants to Central Universities (CUs)



Support to Indian Institutes of Technology



Support to National Institutes of Technology



Support to University Grants Commission (UGC)



Support to Rashtriya Uchhatar Shiksha Abhiyan (RUSA)



Total amount met from Madhyamik and Uchhatar Shiksha Kosh



Source: Union Budget, 2018-19.
In table 2, we have presented the actual and estimated expenditure pattern upon SSA and MDM and their funding from PSK during 2016-17 (actual), 2017-18 (revised estimates) and 2018-19 (BE. We can see that the funding from PSK upon SSA are almost same in actual and budgeted estimates, whereas much higher in estimated budget in case of Mid-day Meal programme. This is true that, the amount spent or allocated upon SSA and MDM, largely gone to States and UTs as central grant. Also, these cesses provide government to increase their fiscal space to fund really important programmes towards education. However, the increment of expenditures upon these programme are largely depend upon the cess collection.   
Table 2: Amount allocated from PSK under SSA and MDM   



Amount met from PSK

Share of PSK (%)

Rs. in Crore

Sarva Shiksha Abhiyan





2017-18 (RE)




2018-19 (BE)




National Programme of Mid-Day Meal in Schools





2017-18 (RE)




2018-19 (BE)




Source: Compiled from Demand No. 57, Union Budget, 2018-19
If we consider the GBS of Department of School Education and Literacy (demand no. 57) and Department of Higher Education (demand no. 58), almost 41 percent of allocated amount proposed to be funded by education cess i.e., PSK and MUSK in 2018-19 (BE). Table 3 presented the net expenditure reported in the expenditure profile for the two departments along with the collection amount from ‘education cess’ and ‘secondary & higher education cess’ reported in the receipts budgets. It seems that in 2015-16 and 2016-17 a substantial dependency took place of these two department’s expenditure upon education cess collection.
Table 3: Education Cess Share upon Total Education Department Expenditure

Rs. in Crore



2017-18 RE

Total Expenditure of Department of School Education and Literacy &

Department of Higher Education




Total Education cess and Secondary & Higher Education Cess




Share of Cess (%)





Source: Union Finance Accounts and Union Budgets.


Similarly, Government has created the Central Road Fund (CRF), under Section 6 of the Central Road Fund Act, 2000. This is a non-lapsable fund and partly funded by road and infrastructure cess (Duty of Excise on Motor Spirit and High Speed Diesel Oil). This fund used for development of State roads, rural roads, railways etc. Also, in 2018, after announcing a hike in road and infrastructure cess, Union Government has announced that CRF will be amended and renamed as Central Road and Infrastructure Fund Act to fund most of the infrastructure sector. 

As already mentioned that many cesses have been abolished during the last financial year. Those are ‘Education Cess on Excisable Goods’, ‘Secondary and Higher Education Cess on Excisable Goods’, ‘Clean Energy Cess’, ‘Swachh Bharat Cess’, ‘Infrastructure Cess’, ‘Krishi Kalyan Cess’ and also some other cess on commodities, such as Cess on Rubber, Automobile, Tea, Coal, Beedis, Sugar, Jute Goods manufactured or produced or in part of jute and cess levied on water consumed by certain industries and by local authorities. 
Long back in 1988, the Sarkaria Commission had remarked that cesses must be for limited duration. However, the cesses were introduced for a specific purpose or ‘earmarked’ for any particular objective (Article 270 of the Constitution). Thus it is expected that all cesses should be introduced for a particular social objective within a certain period, and should be abolished after that period along with achievement of the said purpose.
However, some of the abolished cesses were introduced in different time, to fund significantly important objectives. For instances, amount collected from ‘Krishi Kalyan Cess’ used to fund farmers in drought hit areas, interest subsidy on crop loans and crop insurance like Pradhan Mantri Fasal Bima Yojana. Thus, it is also important to look at the funding pattern of the earmarked purposes of the abolished cesses in the coming years.
Dr. Satadru Sikdar is Research Associate at the National Institute of Public Finance and Policy, New Delhi.


The views expressed in the post are those of the author only. No responsibility for them should be attributed to NIPFP.

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