Income for the union government through various cess and surcharges levied increased 111% between FY18 and FY22 as per data released by the finance ministry.
The Centre levies cess and surcharge on various taxes and except the cess collected towards compensating the states for loss on implementing GST, all other revenue under these two heads goes directly to the Centre.
A total of 22 cesses are being levied by the Centre and among the 22, cess is levied on sale of salt as well as sugar. The amount of cess and surcharges excluding compensation cess, increased from ₹1,54,392 crore in FY18 to ₹3,53,664 crore which is 133% more.
Along with compensation cess, the total collection increased from ₹2,17,004 crore to ₹4,58,433 crore signifying an increase of 111% in the five years.
“Utilisations/transfers of proceeds of various cesses and surcharges to the reserve funds are governed by the enabling provisions of appropriate Act(s) or the executive decision, as the case may be,” says a senior finance ministry official.
Centre expects the total revenue from cess and surcharge for FY23 to be ₹3,55,320 crore, a drop of 22% compared to the previous financial year.
“Both the transfers to reserve funds and the actual expenditure for the purpose are carried out after due appropriations approved by the Parliament. For instance, in the case of GST compensation cess, the proceeds of the cess leviable is initially credited to the Consolidated Fund of India, in terms of Article 266 of the Constitution of India, and the funds are provided to the States/UTs through GST Compensation Fund created in Public Account of India as per provisions of the GST Compensation Act, 2017,” says the official.
In FY23, despite the collection of ₹1,15,650 crore (till February 2022), a total amount of ₹1,49,168 crore was released to the States/UTs, he says.
Further, during FY21 and FY22, the union government decided to borrow an amount of ₹1.1 lakh crore and ₹1.59 lakh crore to meet the shortfall in GST compensation cess collections and transferred the amount to the states as back-to-back loan to strengthen the states’ resources.
Collection of GST compensation cess increased from ₹62,612 crore in FY18 to ₹1,45,000 crore as per the union budget for 2023-24.
The Centre, despite collecting large amounts in the form of cess and surcharge, has several crores as unutilised amount. In FY18, the unutilised amount was ₹61,590 crore and in the 2023-24 budget the Centre expects ₹95,023 crore as unutilised.
The second largest cess after GST compensation is the health and education cess. The government charges 4% health and education cess on the tax liability of individuals. This cess was introduced in Union Budget 2018 by then finance minister Arun Jaitley, who replaced the earlier secondary and higher education cess of 3%.
As the name suggests, health and education cess is collected with the aim of addressing the educational and healthcare needs of rural families in India.
With the Centre deciding not to extend GST compensation beyond FY23, big states are likely to lose considerable revenues.
The economies of half-a-dozen states are set to be most severely affected because of the termination of the GST compensation programme in June last year, a Reserve Bank of India report on state finances said.
The share of GST compensation had exceeded 10% of the tax revenue for states on average, according to the report. A least 10 states, including Karnataka, Tamil Nadu, Maharashtra, Gujarat and Uttarakhand, are expected to fall short of the expected 14% GST growth, as per their budget estimates.
“During the five-year transition period, the top five compensation-receiving states were Maharashtra, Karnataka, Gujarat, Tamil Nadu and Punjab. However, the states which are likely to be most adversely affected by the end of the compensation regime are Puducherry, Punjab, Delhi, Himachal Pradesh, Goa and Uttarakhand, for which the share of GST compensation in tax revenue has exceeded 10% of an average," says the RBI report.
It says the northeastern states had been the biggest beneficiaries of the GST regime, recording a compound annual GST revenue growth rate of 27.5% since the implementation of the tax—FY18 to FY23 period—as against 14.8% for all states.
Tamil Nadu, one of the biggest beneficiaries of the GST compensation since 2017 when the new tax regime was introduced, now stares at an annual loss of ₹20,000 crore from FY24 as the Centre has refused to extend GST compensation to states beyond June 30, 2022. But the state is confident of overcoming this shortfall through increased own-tax revenues and other means.
“We are confident of the state earning higher revenue. Revision in guideline value of properties and reduction in registration revenue could result in additional revenue of ₹2000 crore,” says Tamil Nadu finance secretary N Muruganandam.
Recent revision of tariff by Tamil Nadu Generation and Distribution Corporation (Tangedco) has resulted in lowering the loss faced by the discom. This, in turn, has lowered the burden on the Tamil Nadu government finances, the secretary said.
The state is also looking at mining to increase its revenue. “Mining is another big opportunity that we are eyeing to improve the revenues. It has to get the desired focus as it offers a lot of opportunities to expand the revenue,” said Muruganandam.
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