What is Cess on Income Tax: Overview, Types and Calculation
Cess is a tax on taxes imposed by the Central Government or state governments for specific reasons. The government levies new cess to raise funds for specific purposes; for example, education cess on income tax aimed to generate funds for primary and secondary education. Such special taxes are not meant to be permanent but are usually discontinued after their objectives are fulfilled.
What is Cess?
Unlike usual taxes and duties, cess is imposed as an additional tax on existing tax for a specific purpose. After the government collects enough money for that purpose, it usually stops charging it. Cess can be levied on both direct and indirect taxes. All collected money from a cess goes towards the particular purpose only.
The government can impose cess for developing various sections of the economy or for certain social causes. For example, the State Government of Kerala introduced a 1% calamity cess on GST in 2018 after the Kerala floods. The Central Government can introduce an education cess, health cess, or sanitation cess.
Cess can be imposed on every taxpayer’s basic tax liability or on GST of luxury items and sin goods.
Difference between Cess and Other Taxes
Unlike other taxes such as income tax, excise duty or GST, cess is charged on and over 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.
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Types of Cesses Levied by the Government
The following are some of the different cesses that the government levies on taxpayers:
- Education Cess: The government introduced an education cess on income tax to provide free standard primary education for all citizens. It funded the establishment of new schools and colleges, mid-day meals and special schemes such as Rashtriya Madhyamik Shiksha Abhiyan.
- 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.
- 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.
- Infrastructure Cess: The Indian government imposed an infrastructure cess on the production of vehicles to fund infrastructure projects. The rates of this cess depended on the type and capacity of vehicles.
- Clean energy Cess: This was a carbon tax introduced in 2010. It imposed taxes on the production and import of coal, peat, and lignite.
- Health and Education Tax: This was introduced in 2018 to fund the education and health needs of rural and BPL (Below Poverty Line) families. The government levies a 4% cess on taxes payable to fund government welfare programs for health infrastructure and education.
With the exception of the health and education cess at 4%, all of these cesses have been abolished.
How Does Calculation of Cess Work?
Unlike other taxes, cess is levied on and over a current tax. For cess on direct taxes, it is added to a taxpayer’s basic tax liability, while for indirect taxes, the producer of goods/services must pay it. The following example will show how the calculation of health and education cess works.
Suppose Mr. Kumar has an annual income of Rs. 7 lakh. He has spent Rs. 40,000 on a life insurance policy and has invested Rs. 60,000 in PPF. His tax calculation after health and education cess in AY 2022-23 is as follows:
Gross income after deductions u/s 80C- Rs. 7,00,000 – Rs. 1,00,000 = Rs. 6,00,000
Taxable income – Rs. 6,00,000
Taxes applicable under the old regime – Rs. 32,500 (5% of 2,50,000 + 20% of Rs. 1,00,000)
Surcharge applicable – Nil
Tax payable – Rs. 32,500
Health and education cess – Rs. 1,300 (4% of Rs. 32,500)
Total taxes after surcharge and cess – Rs. 33,800
Therefore, Mr Kumar’s net tax liability for AY 2022-23 is Rs. 33,800.
Final Word
Cess is a tax levied on other taxes, and anyone liable to pay taxes must pay this additional amount over existing taxes. The Central Government and state governments impose this tax when they need funds for specific purposes. Currently, you have to pay only the health and education cess on income tax at a 4% rate.
FAQs
Ans: 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.
Ans: 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.
Ans: 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.
Ans: 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.
Ans: 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.
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This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information, and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.
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