CESS: It is a kind of tax collected by the Government for a specific purpose and it is levied until the purpose for which it is collected is fulfilled. It is considered as an additional tax imposed by Government other than the usual taxes and duties like Income Tax, Property Tax, Gift Tax, Sales Tax, Customs Duty, etc. Cess was originally enacted in Scotland as a property tax in 1665. Then, it was used to refer to the tax on rubber export in Thailand and is collected for Rubber Replanting Aid Fund. Generally, the word ‘Cess’ is used short for ‘Assess’ as the Government determines Cess during the Assessment of tax liability of an individual. Cess was first levied on industries for the development of industries in 1953. It was first introduced in India in the Union budget 2018 in the form of Education Cess and Health Cess. Swachh Bharat Cess was introduced in 2015 and Krishi Kalyan Cess in 2016 at 0.5% on the Income taxed. At present, the Cess is charged on the taxable income of a person at 4% which includes 2% of education Cess, 1% of Higher education Cess, 0.5% of Swachh Bharat Cess and 0.5% of Krishi Kalyan Cess. Education Cess was introduced with an objective to provide primary education. Later, when the Government realized the need to provide standard quality of education, an additional 1% of secondary and higher education cess was added. Swachh Bharat cess was introduced to fund for the national campaign program called Swachh Bharat Abhiyan. It aims to provide sanitation and ensure hygiene across the country. It focuses mainly on offering sanitation facilities, building toilets in rural and urban areas, to educate public on diseases caused by unhealthy habits etc. Krishi Kalyan Cess is levied by Government for improving better agricultural initiatives and for financing. It is applicable to all the taxpayers irrespective of their income or benefits available to the taxpayers. The collected Cess is paid to the Consolidated Fund of India and should be used only for a legitimate specific purpose. If the amount is not used in the current year, it should be carry forwarded and used next year. Cess is easy to levy as it does not require much regulation and it can be abolished once the purpose id fulfilled. Cess also helps the poor by promoting social sectors with the objectives like basic health facilities and education needs.
There are many types of Cesses such as Compensation Cess, Educational Cess, Krishi Kalyan Cess, Swachh Bharat Cess, Health Cess, Flood Cess, Infrastructure Cess, Cess for Vehicles, Recent cesses like Covid cess etc. Cesses levied by the Government at present are primary education cess and secondary education cess which together combined can contribute to 3% of cess, cess on crude oil and petroleum is levied at 20% on value of oil, the Agriculture and Development Cess as per the production of agricultural produce, National Calamity Contingent Duty on tobacco products which is levied on certain goods specified under Schedule VII of the Finance Act 2001 in the form of an excise duty, education cess on imported goods which is levied at 2% of customs duty and no credits are available under this cess and health cess with 5% of cess on importing of medical devices, clinical trials, tele medicine, health insurance, building of hospitals, medical infrastructure etc. Some of the other Cesses are Krishi Kalyan Cess is levied at 5% on all services which attract service tax, Swachh Bharat tax is levied at 0.5% cess for the purpose of promoting cleanliness across the country, Clean energy Cess which is also known as carbon tax is levied on the production of coal, lignite, etc. Many cesses were abolished after the GST was introduced in 2017.
In Hingir Rampur Coal Co. Ltd Vs. State of Orissa, it was held that “Cess maybe any tax or fee which is used when the levy is for some administrative expenses which the name (health cess, education cess, road cess etc.) indicates.” Cess is a specific kind of tax which and that it is should be used only for specific purposes was established in the case of Vijaya Lakshmi Rice Mills Vs. Commercial Tax officers. It was explained that a health cess should be used only for the purposes of providing the poor with medicines, construction of hospitals and other activities which benefit and satisfy the purpose of health. Therefore, it is established that the Cess has to be levied only if there is specific purpose and the purpose must be transparent. Otherwise, there may be misuse of the power and irregularities in the usage of Cess fund.
SURCHARGE: It is an additional charge on payable tax which is levied on individuals and companies based on their income. Therefore, it is progressive in nature. The surcharge amount is collected and retained in Consolidated Fund of India and can be used for any purpose. It is not collected for a temporary purpose and is permanent by nature. Surcharge is added to the Income Tax amount and then the value of Cess is determined. Surcharge is not applicable for the purpose of Tax Deducted at source which is given under section 194C of the Income Tax act, 1961. It was proposed in the Budget 2019 to increase the percentage to levy surcharge on higher income groups. However, they have not been modified for individuals with income between Rs.50 lakhs to Rs.1 crore and for individuals with income between Rs.1 crore to Rs.2 crores who are charged with 10% and 20% surcharge respectively in financial year 2018-2019. Changes that have been proposed in the Budget 2019 with regard to the new surcharge rates is to increase it to 25% of Annual Income for individuals earning between Rs.2 crores to Rs.5 crores and 37% of surcharge rate if the income of individual exceeds Rs.5 crores for financial year 2019-2020. Earlier surcharge rate was 15% which will be applied to the present financial year 2019-2020 and increase in the surcharge rate will be applicable in the next financial year 2020-2021 which is made 39% for individuals earning between Rs.2 crores – Rs.5 crores. The effective surcharge rate for individuals with income exceeding Rs.5 crores is made 42.7% for financial year 2019-2020. Surcharge levied in case of Hindu Undivided Family or Body of Individuals or Association of persons is 10% if the income earned is between Rs.50 lakhs and Rs.1 crore and effective rate of surcharge if income is exceeding Rs.1 crore is liable to pay 15% of the Surcharge. If the Income is below Rs.50 lakhs, the amount towards surcharge is nil. In case of domestic companies, rate of effective surcharge applicable is nil if the income is below Rs.1 crore, 7% of surcharge if it is between Rs.1 crore to Rs.10 crores and 12 % if it exceeds Rs.10 crores.
In Commissioner of Income Tax Vs. K. Srinivasan, the income tax officer has levied surcharge and additional surcharge as per rates under the Finance Act,1963. It was decided that the Income Tax included the surcharge and were not included in the income. Ruling was given in the favour of the assesse.
COMPARATIVE ANALYSIS OF CESS, SURCHARGE AND TAX
|Cess is explained under article 270 of the Constitution.||Surcharge is given under 271 of the Constitution.|
|Cess is kept as a separate fund after being collected into the Consolidated Fund of India.||It is retained within Consolidated Fund of India.|
|The rate of tax of cess is 4%.||The effective rates of surcharge depends on the income and be 10%, 15%, etc.|
|Cess is calculated on taxable income + surcharge.||Surcharge is calculated on the amount of income.|
|Cess is collected from all taxpayers irrespective of their income.||Surcharge is collected from only high income group of people.|
|Cess is temporary in nature.||Surcharge is permanent in nature.|
|Cess is a kind of levy collected for a specific purpose along with other taxes.||It is compulsory contribution which is levied on income, profits of business, cost of goods and services etc.|
|The amount collected will be shifted from the Consolidated fund into a separate fund.||The amount will be collected within the Consolidated Fund of India.|
|Cess amount is collected by the Central Government but not shared with State Government.||Tax is Collected by the Central government and shred with the State Government.|
|Surcharge is an additional tax and can be collected for any purpose.||Surcharge is an additional tax and can be collected for any purpose.|
|Surcharge is calculated on taxable income.||Tax is calculated on total income.|
|Surcharge is collected by the Central Government but not shared with State Government.||Tax is Collected by the Central government and shared with the State Government.|
IMPACT OF CESS AND SURCHARGE ON TAXPAYERS
Although Cess is collected for a temporary purpose and can be abolished when there is no purpose, it is still considered as an extra tax as it is paid along with the other taxes. The impact of Health and education cess increases the overall amount payable in the form of tax. Cess collected through various products in the indirect form increase the price of product which proportionally affects and increases the standard of living. Some effects which are caused by levying infrastructure cess is hike in prices of mass market vehicles which may increase the cost up to Rs.2000. Some of the recent changes made to Agriculture Infrastructure and Development Cess which is levied on commercial produce of agriculture, petrol, diesel and imported products is increase in rate of cess. However, the increase in burden on petrol and fuel will not be observed as the basic excise duty and the special additional excise duty have been reduced. Customs duty to be reduced to 50% of the cost of assessment and cess will be levied on both assessment cost and customs duty together.
Surcharge is progressive in nature and it effects the higher income group of people as the tax payable increases and so the tax burden. One of the objectives of levying surcharge is to increase tax burden on high income group of taxpayers. Although it is collected for non-specific purpose, any deductions or exemptions cannot be claimed. Marginal relief is designed to ensure that the rate of surcharge is not higher than the actual increase in income. Therefore, it applies only on the increased income. The recent budget proposal included an increase in surcharge of foreign entities which are registered as non-corporates which will have an impact of 40% on of the FPIs.
The cess collected will be used to introduce and implement new schemes of Government. For instance, the Education cess is collected for providing education at primary, higher and secondary education and it will be abolished once the purpose is fulfilled. The main issue with respect to the cess is no transparency in usage of cess and the taxpayer pays it in faith of cess amount being used for health, education etc. Irregularities in the use of Cess funds can be observed when it is not used for specific purpose. For an instance, National Clean Energy fund is established by using the cess fund on production of coal. But this amount has been used for other programs such as Green India Mission, National solar mission, etc. which is against the primary objective of levying cess. Therefore, cess should not be made as the permanent source of revenue for the Government as it is created to fulfil a present purpose only.
Surcharge will provide more revenue to the Government apart from what is earned from levying taxes. However, the compliance should be kept in check and proper mechanism should be used to prevent tax evasion. They ensure that the taxation system is more progressive and there will be less burden on the poor people but it provides enough revenue to the government to use for any purpose.