Cess on Income Tax: Overview, Types and Calculation
What is Cess on Income Tax?
Cess is an additional tax on taxes imposed by the central government or state governments for specific reasons. The government levies a cess to raise funds for specific purposes only; for example, an education cess on income tax is aimed to generate funds for primary and secondary education. Such special taxes are not meant to be permanent and are usually discontinued after their objectives are fulfilled.
The government can impose cess for developing various sections of the economy or for certain social causes. Cess can be imposed on every taxpayer’s basic tax liability or on the Goods and Services Tax of luxury items and sin goods.
Types of Cess Taxes Levied in India
1. Health and Education Cess
Introduced in Budget 2018 to fund the education and health needs of rural and Below Poverty Line families, the government levies a 4% Health and Education cess on income tax for all slabs.
2. Cess on Crude Oil
The Centre levies a 20% ad valorem oil industry development cess on crude oil and natural gas produced from domestic oil blocks.
3. Road and Infrastructure Cess
The Government of India under the Finance Act, 2018 had introduced a ‘Road and Infrastructure Cess’ under section 109 and 110 of the Finance Act, 2018 to be collected and levied on specified imported goods and excisable goods, namely petrol and high-speed diesel oil. In 2022, the rate of this cess was reduced to ₹1 per litre of petrol or high-speed diesel oil.
4. Construction Workers Welfare Cess
Building & Other Construction Workers’ Welfare Cess [BOCWW Cess] is levied at 1% on the cost of construction incurred by an employer as per the provisions of Sections 3(1) and 3(3) of the Building and Other Construction Workers’ Welfare Cess Act, 1996.
5. National Calamity Contingent Duty
The National Calamity Contingent Duty (NCCD) is imposed by the central government on pan masala, chewing tobacco and cigarettes. In Budget 2023, the government has proposed to revise the NCCD on specified cigarettes upwards by about 16%.
6. GST Compensation Cess
GST Compensation Cess is levied on luxury goods and demerit categories. It has to be paid by all the taxpayers except those who export the notified goods and those who have opted for the GST composition scheme.
Also Read
Other Types of Cess Levied by Government of India
1. Swachh Bharat Cess
In 2015, the government introduced this cess to fund a national campaign for cleaning up roads, streets and infrastructure. It imposed a 0.5% cess on all taxable services to fund the Swachh Bharat initiative.
2. Krishi Kalyan Cess
This was introduced in 2016 to facilitate agricultural development in India. It was applicable as a service tax at a 0.5% rate on the on-paper price of every service.
3. Clean Energy Cess
This was a carbon tax introduced in 2010. It imposed taxes on the production and import of coal, peat, and lignite.
Issues on Cess Charges
1. Lack of Transparency
One of the main issues with cess charges in India is the lack of transparency in the use of funds collected through cess. On many occasions, funds collected via cess are grossly underutilised.
2. Double Taxation
Cess charges are essentially double taxation, as they are charged on top of other taxes. This could lead to additional tax liability or make certain products more expensive.
3. Ineffectiveness
Cess charges may not always be effective in achieving their intended purpose, leading to wastage of public funds.
Difference Between Cess and Other Taxes
Unlike other taxes such as income tax, excise duty or GST, cess is charged over and above existing taxes. Another difference between central taxes and cess is that the Central Government does not need to share its proceeds from cess with all state governments. However, it must share collections from other taxes in fixed proportions.
All general taxes go to CFI (Consolidated Fund of India) and can be used for various purposes. While cess also goes to CFI, the government cannot use it for any other purpose than its stated one. If the collected amount is not used in a specific year, it gets carried over to the next one and can be used only for its stated purpose.
Introducing cess is also much simpler than introducing provisions for new taxes. Unlike general taxes, which require amendments to the Income Tax laws, cesses are easier to modify and abolish.
Final Word
Cess plays an important role in funding various government schemes and programmes in India. It provides an additional source of revenue for the government to undertake development projects, address social issues, and provide relief during natural disasters. The government, however, must ensure the cess collections are not underutilised and channeled to meet the specific objectives in time.
If you want to read more about income tax in India, do check our blogs here.
FAQs
A surcharge is a fee added to taxes payable if the assessee’s total income exceeds specified limits. Taxpayers with an annual income of Rs. 50 lakh to Rs. 1 crore must pay a 10% surcharge. Those with income over Rs. 5 crores must pay a 37% surcharge.
Cess increases a taxpayer’s tax outflow just like any other tax. Owing to its non-permanent nature, the cess on taxes may vary in future. Cess on indirect taxes may increase the cost of goods and services, leading to consumers bearing higher costs.
No, the Finance Minister, in a clarification, has stated that no one can treat health and education cess as business expenditure. This ends a long-pending tax-related legal question due to conflicting interpretations of the law by some high courts.
The government levies cess for a specific purpose and withdraws it when such purpose ceases to exist. As some sectors need more priority, it earmarks the funds for a particular purpose, ensuring that it cannot be used anywhere else.
According to the Income Tax Department, surcharge and education cess are applicable for TDS purposes only in the case of tax deduction from payment of salary to residents, non-residents and foreign companies. It is not applicable on TDS for any other purpose.
Cess is levied in India so that the government could raise necessary funds for specific socio-economic welfare purposes.
A cess levied on direct taxes is added to tax liability and paid by all eligible taxpayers. On the other hand, a cess levied on indirect taxes like GST is paid by the producer of such goods and services.
Read More on Income Tax Act
