15th Fin panel to commission study on cess collections

The 15th Finance Commission will commission legal studies on the cesses and surcharge levied by the Central Government but from which no share is devolved to the states.

The Finance Commission, which every five years recommends a ratio in which the tax money collected by the Central Government is to be divided among the states, has begun work and will submit its report by October 2019, sources said.

In the pre-GST era, collections from direct taxes like income tax and corporate tax and indirect taxes including excise duty and service tax were divided between the centre and the state in a ratio recommended by the Constitutionally-mandated Finance Commission.

After the Goods and Services Tax (GST) was rolled out from July 1 last year subsuming excise duty and service tax along with other central and state levies, the 15th Finance Commission headed by NK Singh will suggest what will be states' share in direct tax and GST collected by the centre.

In both scenarios, cesses and surcharge levied by the Centre are not included in the divisible pool, sources said.

The 15th Finance Commission, they said, will get ‘some legal studies’ done on the entire cess and surcharges.

A cess is a tax on tax. For example, the education cess of 3 per cent is imposed on personal income tax. Besides education cess, there are road cess, infrastructure cess, clean energy cess, krishi kalyan cess and Swachh Bharat cess. Surcharge is a charge on any tax, charged on the tax already paid.

The biggest source of revenue through cess is the central road fund. In the Budget for 2018-19, Finance Minister Arun Jaitley rejigged excise duty on petrol products by cutting basic excise duty by Rs 2 and abolishing additional excise duty of Rs 6 but bringing a new road cess of Rs 8 a litre.

The previous 14th Finance Commission had raised the share of states in centre's tax revenue to a record 42 per cent for five year period starting 2015-16, up from previous 32 per cent.