States are ultimate beneficiaries of cesses: FM Sitharaman

Finance Minister Nirmala Sitharaman

Countering allegations that cesses are not being fully shared with the states, Finance Minister Nirmala Sitharaman on March 27 asserted that in fact they are the ultimate beneficiaries of cesses collected by the central government.

"States are ultimate beneficiaries of cesses. Receipts of cesses are for meeting specific expenditure," she said in the Rajya Sabha while replying to the discussion on the Finance Bill 2025. She emphasised that the funds collected through cesses are utilised for central sector schemes and centrally sponsored schemes such as the Mahatma Gandhi National Rural Employment Guarantee Act (MNREGA), the food security programme, and the mid-day meal scheme, among others.

Some of the key cesses levied by the Centre include education cess levied to fund primary and secondary education initiatives, health and education cess collected to finance healthcare and education projects, and road and infrastructure cess imposed on fuel to fund road and infrastructure development.

Providing data on cess collection and expenditure, Sitharaman stated that between 2019-20 and 2024-25, the Centre utilised 105 percent of the cess collected, amounting to Rs 15.96 lakh crore against a collection of Rs 15.4 lakh crore.

Her remarks come in response to repeated concerns raised by states regarding the distribution of cesses and surcharges, which do not form part of the divisible pool of taxes. States have often claimed that the Centre has increasingly relied on cesses and surcharges, thereby reducing the shareable pool of revenue.

States' Concerns

Several state governments, particularly those governed by opposition parties, have criticised the Centre for allegedly withholding a fair share of revenue by imposing cesses and surcharges that are not subject to devolution under the Finance Commission’s recommendations. They argue that this practice reduces the funds available to states for developmental activities.

This has led to growing demands from states for a review of how cesses are levied and whether they should be included in the divisible tax pool.

What are Cesses?

Article 271 of the Constitution allows the Centre to levy surcharges and cesses, the proceeds of which are not required to be included in the divisible pool of taxes shared with states.

A cess is a tax levied by the government for a specific purpose, distinct from general tax revenue, which is meant for overall expenditure. Unlike general taxes, which are part of the divisible pool shared between the Centre and states, cesses are earmarked taxes collected for specific purposes, meaning they cannot be used for general government expenditure and must be allocated to their designated sectors.