Friday, April 29, 2016

The ” CESS” Pool — Stop This Taxation Through The Back Door

The following has been posted by Avay Shukla for

The government has given us our belated Diwali gift – a brand new Cess on all services. From 16.11.2015 we shall all now have to pay an additional 0.50% Cess on all services on which service tax is applicable. And this is not 0.50% of the service tax but 0.50% of the cost of the service. Most bills of daily services availed by all economic strata shall now go up – telephone/mobile, eating out, travel, all forms of insurance, TV charges, entertainment, etc.etc. This additional burden is the Swachh Bharat Cess (SBC) which is intended to fund the Clean India mission. By itself the SBC may not be a back – breaker but the larger picture should give us some food for thought.

Our Cess pool already has 20 Cesses, one of them dating back to 1953! (Salt cess). We also have six surcharges. The five top Cesses in terms of revenue earned are: Road Cess (2005, Rs. 43,100 crores), Education Cess (2004, Rs. 26,677 crores), Clean Energy Cess (2010, Rs.13,118 crore), Secondary and Higher Education Cess (2007, Rs. 1812  crore), and Research and Development Cess (1986, Rs. 750 crore).
You would be reasonable in presuming that since Cesses are essentially tax on tax, and of tiny percentages, they are not really a matter of concern – and you would be dead wrong! Sample this: In 2015-16, out of total tax receipts of Rs. 9.20 lakh crores in the central budget, the various Cesses shall contribute Rs. 1.52 lakh crore, or 16.60% – one in every 6 tax rupees! The corresponding percentage in 1999 was 1.81. Its quite obvious that this virus has profligated promiscuously in North Block over the last fifteen years, and if not stopped shall soon assume endemic proportions.
Systematic taxation by Cess is abhorrent to any fair and enlightened form of budgeting. Originally conceived in Ireland to tide over a temporary exigency, under our scrounging mandarins, it has simply become a permanent tax by another name. Fiscal fairness and logic demand that once that temporary need or situation is over the Cess should be discontinued. That never happens in India, as evidenced by the Salt Cess which has been around for 62 years, or the Mines Cess and the Beedi Workers’ Cess which have been fattening the coffers for the last 40 years.
Secondly, if the need for a particular Cess is felt to be of a permanent nature then it should be levied as a Straightforward Tax (which can be properly examined and debated in Parliament) and not squirreled away among the fine print of the budget papers. One reason why the central government is loath to do so is that whereas taxes have to be shared with the states, a Cess is retained by the centre exclusively. Its time the states woke up to this day light robbery!
My most serious objection to taxation by Cess, however, concerns the manner in which these funds are utilised. Take just two of them: Construction Workers’ Cess (CWC) and Research and Development Cess (RDC). The CWC is a joke – ask any construction worker, whose lot remains just as risky, impecunious and insecure as in 1996 when this Cess was introduced. Had the government used this money to start an insurance or health care scheme, or provide safety equipment, or creches for women labourers, or special schools for their children, in any meaningful way then perhaps we would not have complained about this imposition. But nothing of the sort has happened: of course, schemes have been formulated on paper, more offices opened and staff recruited, but the construction labourer remains at the mercy of the contractors, a pawn in an entirely unorganised sector which the government has failed to regulate but in whose name it taxes us!
Almost Rs 750 crore is collected as R+D Cess every year: where does this money go? The state of R+D in this country with a two trillion dollar economy is pathetic in all fields – health, agriculture, industry, defence, manufacturing to name just a few sectors. Whatever research there is is being done by the private sector and the government has little to show for the thousands of crores it has been collecting for the last twenty years.

The ugly reality is that the government has discovered that a Cess is an easy method of garnering funds to buttress its kitty and to bridge deficits in other sectors. Searching for figures of actual utilisation of dedicated cess receipts I found that in 2004-2005, it collected Rs. 5100 crores as Education Cess but spent only Rs. 2000 crore of it on Education. I would be very surprised if this was not the case also with other Cesses. In my view the CAG should carry out a dedicated audit of all 20 Cesses from their inception to determine how much was collected and spent under each Head – the results should be revealing.
The Swachh Bharat Cess now imposed is another regressive form of taxation: it is expected to generate Rs. 1200 crore per annum and will hit the middle/lower income classes the most. Its purpose is to clean up the environment. This raises an important question: should not core activities of the government be funded by the sectoral budgetary provisions rather than by imposing additional Cesses? Surely, Roads, Education, the Environment and Clean Energy are mainstream government concerns and should be funded by government’s tax / non-tax receipts and not ad-hoc Cesses? The current year’s budget already provides Rs. 3500 crore for the Clean India Mission: where then was the need to pilfer another Rs. 1200 crore from the public? By constantly resorting to this convenient mechanism the government is actually abandoning the fiscal discipline inherent in the prioritisation of expenditure, and taking the easy way out – at our expense.
We are told that the SBC shall be used to construct 120 million toilets to stop open defecation, a pure engineering solution that indicates that we have learnt nothing from the past. The UPA had also spent thousands of crores on such a scheme, resulting either in “ghost toilets” which were paid for but never built, or toilets that function as stores for cattle feed – and 600 million Indians continue to defecate happily in the open or on railway tracks! Experience in states such as Himachal Pradesh where the scheme has been fairly successful reveals that what is needed is overcoming age-old shibboleths that open defecation is healthy (and even ordained by religious tradition!), convincing families of the clear connection between open defecation and child mortality and so on. One interesting statistic on the subject is contained in a 2005 study by the government: the percentage of Muslim families defecating in the open is 42% as against 67% for Hindus. The connection with child mortality? – child mortality rates are higher among Hindus than Muslims, according to an article dated July 19, 2014 in the Economist: 1.7 more Muslim children per 100 children survive to the age of five years than Hindu children. What is needed is not the pumping in of more and more money but a dedicated extension effort, which the government appears to be incapable of. It should be roping in grass-roots CBOs and NGOs for the purpose since it lacks the capacity itself, but is more busy issuing them notices and freezing their bank accounts.
The same is the story with the cleaning up of the Ganga and the Yamuna: in the last ten years more than Rs.10000 crore and Rs. 3500 crore (also collected from various surcharges and fees) have been spent in efforts to clean up the two rivers respectively, but they become more polluted every year. The problem is sheer incompetence, corruption, insensitivity to the environment and reluctance to take hard decisions. Just last week it was reported that the sand mafia in Faridabad/NOIDA has built a sand BRIDGE across the entire width of the Yamuna! – and neither of the two administrations claimed to be aware of it. The government will not take the obvious decisions which alone can save these rivers – ban sand mining, stop the construction of more dams upstream, ensure a regular and adequate flow of water, stop immersion of hundreds of toxic-painted idols in their waters, prevent the encroachments on their floodplains, treat urban sewage properly. Why should it, when it is far easier to impose another Cess ?
It’s all about the money, honey!
Avay Shukla retired from the Indian Administrative Service in December 2010. He is a keen environmentalist and loves the mountains.....he has made them his home.

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