Will she or won’t she? That’s the big question on taxes on the minds of corporate executives and high net-worth individuals across India. Taxpayers are anticipating with dread that finance minister Nirmala Sitharaman will announce a Covid cess or surcharge on income taxes in the Union Budget for 2021-22 to raise resources for a national rollout of the vaccine.
Dread, as tax liabilities will rise for all taxpayers if a cess like the health and education cess is announced. On the other hand, Sitharaman might opt to impose a surcharge on the income taxes of high net-worth individuals, other entities and profitable companies.
It isn’t unusual for the ruling dispensation at the Centre to announce new cesses and surcharges to raise resources. However, revenue-raising through cesses and surcharges have risen sharply after the Fourteenth Finance Commission raised the share of states in the divisible pools of tax revenues from 32 percent to 42 percent.
The introduction of the goods and services tax (GST) on July 1, 2017 was accompanied by cleaning up and scrapping of cesses on excise duties. Most of these cesses were subsumed into the GST. However, a new cess — GST compensation cess — was introduced to raise resources to make good any shortfall in the tax collections of states against the projections for revenue growth.
The GST compensation cess was originally planned to be levied for three years. But it was extended for a period of five years through an amendment in the Finance Act of 2020 and then again, without a sunset date, when the adverse effect of the pandemic on states’ revenues became apparent. The GST cess is levied on automobiles, tobacco products and aerated water.
Rising cess burden
As things stand, other than the health and education cess on direct taxes and the GST cess, taxpayers bear a cess on petroleum crude and a road & infrastructure cess levied on petrol and diesel. Together, these cesses were estimated to generate Rs 3,04,485 crore in the Budget estimates for the fiscal year 2020-21. Collections will be much lower given the contraction in the economy and fall in income. Data show that the GST compensation cess collection at Rs 59,081 crore at the end of December was just 53.5 percent of the budgeted estimate.
Budget documents show that the actual collection of various cesses had risen 256 percent between 2014-15 and 2018-19, from Rs 58,797 crore to Rs 2,09,577 crore, with collections doubling between 2016-17 and 2018-19. Notably, the share of cess in the gross tax revenues had more than doubled between 2014-15 and 2018-19, rising from under 5 percent to more than 10 percent, actual tax collection data for these years show.
Surcharges rise, too
Along with cesses, the burden of surcharges has become heavier for taxpayers, rising 347 percent between 2014-15 and 2018-19. The collection of surcharges rose from Rs 31,879 crore in 2014-15 to Rs 1,42,530 crore in 2018-19. It was projected to rise to Rs 1,76,277 crore in 2020-21. Over 70 percent of the surcharges collected in a year now come from taxes on companies, businesses and individuals. This happened after the ambit of the levy was widened in 2018-19. A little over 20 percent come from special additional duty of excise on petrol.
Should Sitharaman choose to levy a cess or a surcharge for the Covid vaccine drive, without some rejig of tax slabs, the burden of taxpayers will rise.