In Graphic Detail | Cess and surcharge prop up Centre's fine fiscal balance

The Finance Ministry building situated in North Block, New Delhi

'Cess' should have featured on the list of words that ruled the year just gone by.

As the five-year protected Goods and Services Tax (GST) revenue period for states wound down to an end on June 30, 2022, the GST Council's 47th meeting in Chandigarh was dominated by talks of whether states would continue to get compensated if their revenues under the new indirect tax regime failed to grow 14 percent year-on-year.

To cut a long story short, states failed in their endeavour. But the discussion threw fresh light on how important cesses and surcharges had become for the Centre.

As the finance ministry said in response to multiple questions in the recently concluded Winter Session of Parliament, cess and surcharge collections are not shared with states. This allows the Centre a seemingly ever-growing pool of resources.

Consider the following: more than 20 years ago, in 2000-01, cesses and surcharges accounted for 7.5 percent of the gross tax revenue. This number had crawled up to 8.2 percent by 2011-12, picked up pace to 18.2 percent in 2019-20, and then sprinted to 28.1 percent in 2021-22.

Of course, one can't ignore the fact that since 2017-18, more than Rs 5.5 lakh crore has been collected as GST compensation cess – first to compensate the states for any deficit in collections and then to repay the loans the Centre took on behalf of states after the compensation cess fund itself fell in deficit during the Coronavirus pandemic.

But, there is still a lot being collected. In 2022-23, for instance, the Centre expects to get Rs 1.35 lakh crore as surcharge on corporate and income taxes. Health and education cess on these direct taxes is set to fetch the Centre another Rs 53,846 crore. And then there are the other big guns: road and infrastructure cess and agriculture infrastructure and development cess.

Finance Minister Nirmala Sitharaman was at pains to point out in the Winter Session of Parliament that funds raised through cesses are allocated to different schemes and programmes, which are then implemented by the state governments. But it is also worth noting if they were to be eliminated or become a part of the divisible pool, the Centre's fiscal math could get upended.