Cess and surcharge are the taxes levied by the Union Government in order to raise funds for government operations. Though both Cess and Surcharge add money to the government’s revenue, these are different in many aspects.

Cess and Surcharge are important topics for the UPSC IAS Exam Economy Syllabus.

Cess

• A cess is a tax on tax in basic terms.
• It is critical to remember that a cess must only be applied to the purpose for which it is levied.
• For example, the Indian government collects an education cess and uses it solely for that reason, namely, education.
• Furthermore, this tax is imposed on all taxpayers.
• Cess taxes are paid to the Consolidated Fund of India.
• Cess is generally expected to be charged until the government has sufficient purpose and becomes dormant after the purpose is fulfilled.
• A cess is different from other taxes such as excise duty and income tax as it is levied in addition to the current tax (tax on tax).
• For example, a 5% education cess on a 20% percent income tax will make the overall tax 21%. (20% base tax plus 5% (cess) of the 20%).
• Education cess, road cess, infrastructure cess, clean energy cess, Krishi Kalyan cess, and swachh bharat cess are the key cesses currently in place.

Types of Cess

There are various types of cess levied in India. They are:

• Infrastructure Cess
• Krishi Kalyan Cess
• Cess on Exports
• Road and Infrastructure Cess
• Duty on Tobacco and Tobacco Products
• Health and Education Cess on Income Tax
• Swachh Bharat Cess
• Education Cess
• Cess on Crude Oil

Surcharge

• In the case of individuals earning a net taxable salary of more than Rs 1 crore, a surcharge of 10% is levied on tax liability.
• Surcharge at the rate of 5% is levied on domestic corporations if net income is in the range of Rs 1 cr to Rs 10 cr. If the net income exceeds Rs 10 cr, surcharge at the rate of 10% is levied.
• Surcharge at the rate of 2% is levied on foreign corporations if the net income is in the range of Rs 1 cr to Rs 10 cr.
• If the net income exceeds Rs 10 cr, the surcharge is increased to 5%. Marginal relief is given to both domestic and foreign companies in case the net income exceeds Rs 1 cr and Rs 10 cr.
• A surcharge on income tax is a substantial source of revenue for the government.
• This money is collected for whatever purpose the Union Government deems appropriate.
• It's worth noting that it only applies to the tax due, not the whole income.
• This money is paid to India's Consolidated Fund, which can be utilised for any purpose.
• A 10 per cent surcharge on a 30 per cent income tax rate, for example, brings the tax burden to 33 per cent.

Similarities Between Cess and Surcharge

• Both a cess and a surcharge are levied by the central government.
• Both are collected and deposited in India's Consolidated Fund.
• None of these can be shared by state governments.

Difference between Cess and Surcharge

The difference between cess and surcharge is as follows:

Issue of Cess and Surcharge to be included in the tax devolution pool

• The Centre is empowered to charge and collect both direct and indirect taxes under the Union List as part of the allocation of power and duties between the Union and states as provided in the Seventh Schedule under Article 246 of the Constitution.
• This has generated a massive resource mobilisation imbalance to the governments' detriment in delivering their committed social expenditure duties.
• The net proceeds of taxes (also known as net tax revenue) are calculated by subtracting cesses and surcharges from gross tax revenue, as well as the cost of collection and transfer to the National Disaster Response Fund (NDRF).
• As a result, a larger pool of cesses and surcharges reduces the overall amount of the divisible taxes, reducing resource transfer to the states.
• According to the XV Finance Commission, states are responsible for more than 62 percent of expenditures but only 37 percent of revenue raising capacity, whereas the central government has 63 percent of revenue raising authority to spend on 38 percent of expenditures.
• Despite an increase in cesses and surcharges from Rs 49,628.02 crore in 2010-11 to Rs 3,74,471.14 crore in 2021-22, the benefits do not filter down to the states because cess and surcharges are not included in the divisible pool, which is net of taxes.
• Over the years, states have been consistently requesting that the Union government either entirely do away with cesses or if they are continued for a longer term, bring them into the divisible pool.
• States will get a larger part of devolution from the Centre's net proceeds as a result of this inclusion, allowing them to meet their own social, human development, and infrastructural responsibilities.
• By bringing about a constitutional amendment, the fourteenth and fifteenth Finance Commissions suggested that earnings from cesses and surcharges be included in the divisible pool.

Conclusion

Cess and surcharge are both ways for the government to add to their revenue. The union government may apply and utilise these proceeds for the purpose it deems important. Even in contingency situations, these methods can be of immense importance to the government. Given the states' limited ability to generate fresh resources, the Centre must take steps to bring cesses and surcharges into the divisible pool.