FM Sitharaman defends Centre’s right to levy cess, says Constitution allows it
Speaking in the Lok Sabha, Ms. Sitharaman also said that the Centre was sending more to the States than it collected from cesses and surcharges. The Opposition had argued that these levies were not part of the divisible pool.
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Context
In a Lok Sabha debate on the , Finance Minister Nirmala Sitharaman defended the Union government's authority to levy cesses and surcharges. This assertion comes amid ongoing debate with states, which argue that these levies undermine fiscal federalism. The Finance Minister countered this by stating that these levies are constitutionally permitted and that the Centre has spent more on states through specific schemes (105%) than it collected via cesses and surcharges over a six-year period.
UPSC Perspectives
Polity & Federalism
This issue is central to the concept of fiscal federalism, which deals with the financial relations between different levels of government. The Indian Constitution provides a framework for revenue distribution, primarily through Article 270, which outlines the divisible pool of taxes that are mandatorily shared between the Centre and the states based on the 's recommendations. However, cesses and surcharges are explicit exceptions. Article 271 empowers the Parliament to levy a surcharge on certain taxes for the purposes of the Union, with the proceeds not being shareable with states. Similarly, cesses levied for a specific purpose are also kept outside the divisible pool. States argue that the Centre's increasing reliance on these instruments reduces the size of the divisible pool, thereby curtailing their legitimate share of revenue and increasing their dependence on the Centre. This practice, while constitutionally valid, is seen as a violation of the spirit of cooperative federalism. A potential UPSC mains question could be: "While constitutionally sanctioned, the rising share of cesses and surcharges in the Union's gross tax revenue poses a significant challenge to Indian fiscal federalism. Critically analyze."
Economic
From an economic perspective, this debate involves public finance and fiscal policy. Cesses and surcharges are tools for the Union to raise earmarked funds for specific national priorities without being bound by the devolution formula of the . A cess is a tax on tax, levied for a specific purpose (e.g., Health and Education cess), and the revenue must be used only for that purpose. A surcharge is also a tax on tax but is typically aimed at high-income groups, and the government can use the revenue for any general purpose. The Finance Minister's argument of having spent 105% of collections on states is a defense of the Centre's fiscal management, suggesting that these funds are not being withheld but are being channeled back to states through targeted schemes. This is a form of fiscal consolidation where the Centre maintains control over expenditure priorities. However, critics argue this shifts funding from unconditional transfers (devolution) to tied grants (schemes), reducing the states' autonomy in spending.
Governance
The governance lens focuses on the implementation and accountability of funds collected through cesses. The Finance Minister cited schemes like the [Samagra Shiksha Midday Meal Scheme] and the [National Health Mission] as examples of where this money is spent. These are Centrally Sponsored Schemes (CSS), where the Centre provides funds (often a majority share, like 60:40 or 90:10) for schemes implemented by the states. The use of cesses to fund these schemes ensures a dedicated revenue stream. However, it raises governance challenges. First, it reinforces a top-down, 'one-size-fits-all' approach, as states have limited flexibility in designing and implementing schemes according to local needs. Second, it creates issues of accountability; tracking the flow and end-use of earmarked funds from a national cess to a specific project at the district level can be complex, leading to potential under-utilization or diversion of funds. This system places the onus of effective implementation on the states while the control over financial levers remains with the Centre.