Cess on Income Tax

Introduction

Cess on Income Tax is an additional tax levied on the regular income tax payable by taxpayers in India. The government levies cess to raise education, health, infrastructure, and welfare funds. The proceeds from the cess provide essential services to the public.

What is Cess on Income Tax?

Cess is an additional tax on the income tax and central or state governments taxes for specific reasons. The government levies a cess to raise funds for distinct purposes. For example, the education cess aims to generate funds for primary and secondary education. Such special taxes are temporary and discontinued after the accomplishment of the underlying objective. 

Types of Cess Taxes Levied in India:

The government can impose cess for developing various sections of the economy or for specific social causes. The government may levy a cess on every taxpayer's primary tax liability or the Goods and Services Tax of luxury items and sin goods.

There are different types of cess taxes that the Indian government levies for various developmental purposes. Some of the prominent types of cess taxes are:
 

1.    Health and Education Cess

The government introduced the Health and Education Cess (HEC) in 2018, at four per cent of the income tax payable by individuals and corporate entities. The primary aim of the funds collected from this cess is to fund healthcare and education services in the country.

The government uses revenue generated from the HEC for various health and education initiatives, such as improving healthcare infrastructure, promoting health and wellness, and enhancing the quality of education. 

2.    Cess on Crude Oil

In 1974, the Indian government introduced the Oil Industry Development Cess (OIDC) on crude oil production. It funds oil industry development initiatives. The government levies a 20% ad valorem oil industry development cess. The Government of India utilises the funds collected from this cess to develop India's oil and gas sector.

The OIDC has been subject to debate and criticism. Some experts argue that it is regressive and unfairly burdens low-income people who rely on petroleum products for energy. Others contend that the OIDC is necessary to fund the oil industry's development and ensure energy security for the country.

3.    Road and Infrastructure Cess

The government introduced the Road and Infrastructure Cess (RIC) in 2018, at one per cent on the sale of diesel and petrol. The government uses funds from this cess to develop road and infrastructure projects in the country.

The RIC is a fixed amount per litre of petrol and diesel sold. The revenue generated from it funds various road and infrastructure projects, such as the construction of highways, bridges, and airports. In 2022, the government reduced the RIC to ₹1 per litre of petrol or high-speed diesel oil.

4.    Construction Workers Welfare Cess

The government levies a cess on the cost of construction projects to fund the welfare of construction workers in the country. The rate of this cess is one per cent of the total construction cost.

5.    National Calamity Contingent Duty

The government levies a National Calamity Contingent Duty (NCCD) on various goods such as cigarettes, tobacco, and motor vehicles. The purpose of national calamity contingent duty is disaster management and relief activities in the country. In Budget 2023, the government proposed to revise the NCCD on specified cigarettes upwards by about 16%.

6.    GST Compensation Cess

The government levies a GST Compensation Cess on certain luxury goods, such as cigarettes and automobiles, to compensate the State Government for revenue loss arising from Goods and Services Tax (GST) implementation in the country.
 

Other Types of Cess Levied by the Government of India

Apart from the abovementioned taxes, the government levies some other types of cess for various developmental purposes. 

1.    Swachh Bharat Cess

The SBC rate is half a per cent on all taxable services. The revenue generated from SBC is to fund the Swachh Bharat Abhiyan, which aims to improve sanitation and hygiene in India. The campaign includes building toilets, improving waste management systems, and promoting behavioural change to encourage cleanliness.

Initially, the case was a temporary tax for four years. However, in 2018, the Indian government announced that it would discontinue the SBC levy on all taxable services.

2.    Krishi Kalyan Cess

The government charges the Krishi Kalyan Cess at half a per cent on all taxable services. Krishi Kalyan Cess is to develop agriculture and rural areas in the country.

The revenue generated from KKC aims to fund various initiatives related to agriculture and rural development, such as improving irrigation systems, enhancing crop productivity, and promoting sustainable agriculture practices.

3.    Clean Energy Cess

Clean Energy Cess (CEC) was a tax introduced by the Indian government in 2010 to finance clean energy initiatives and reduce the country's reliance on fossil fuels.

The government levies a CEC on the production and import of coal at INR 400 per tonne. The government earmarks funds from the cess to develop clean energy projects in the country. The revenue generated from CEC is for various clean energy initiatives, such as encouraging renewable energy sources like wind and solar power and improving energy efficiency in industries and buildings.
 

Issues on Cess Charges

Despite the government's efforts to use cess taxes for developmental purposes, some issues with their implementation exist. 

1.    Lack of Transparency

Taxpayers are often in the dark about the end use of the tax money, and they may not understand the rationale behind the liability of some taxes. Therefore, it can lead to frustration and mistrust among taxpayers, leading to a lack of compliance and increased tax evasion.

To address this issue, governments can increase transparency in the tax system. Some measures can include providing clear and easily accessible information about taxes and how they are used and ensuring taxpayers have a voice in the tax system and can provide feedback and input.

2.    Double Taxation

Double taxation occurs when a taxpayer is taxed twice on the same income or asset by different levels of government or countries. It can create a significant burden on taxpayers. Even more so for those taxpayers struggling to make ends meet.

To address this issue, governments can take steps to coordinate their tax policies and avoid overlapping taxes. It can include negotiating tax treaties with other countries to prevent double taxation of international income and ensuring that different levels of government coordinate their tax policies to avoid duplication.

3.    Ineffectiveness

Some taxes aim to reduce pollution or encourage certain behaviours, but they may not achieve these goals effectively. In some cases, taxes may have unintended consequences, such as driving businesses or individuals to take detrimental actions to the environment or the economy.

To address this issue, governments can take steps to ensure that taxes are designed and implemented in a way that aligns with their intended goals. It includes conducting thorough research and analysis to determine the most effective tax policies and monitoring and evaluating the impact of taxes to ensure that they are achieving their intended outcomes.

Difference Between Cess and Other Taxes

Cess and other taxes are both forms of revenue collection governments use to finance their activities and provide public goods and services. Below are some key differences.

1.    Purpose

Cess is usually introduced for a specific purpose or project, such as financing clean energy initiatives, improving agriculture and rural development, or promoting cleanliness. In contrast, other taxes, such as income tax, sales tax, or value-added tax (VAT), are generally used to fund general government expenses.

2.    Collection

The government levies a cess on a specific item or activity, such as coal or taxable services. Other taxes, however, are generally collected on a broader range of items or activities. The government can use revenue generated from these taxes for various purposes.

3.    Rate

The rate of cess is a fixed percentage of the value of the item or activity, and this rate may vary depending on the specific cess. Other taxes, on the other hand, may have different rates for different things or activities, and the rates may also vary depending on the taxpayer's income level or other factors.

4.    Duration

Cess is for a specific time, and the government may discontinue its collection once the purpose on achieving the underlying objective. In contrast, other taxes are usually permanent, and the collection continues year after year.

Conclusion

Taxes are important for governments to raise revenue and achieve their policy objectives. However, it can be frustrating and confusing for taxpayers, especially when they lack transparency, result in double taxation, or are ineffective in achieving their intended goals. To address these issues, governments can increase transparency, coordinate their tax policies, and ensure that tax design and implementation align with their intended goals.