Cesses and Surcharges

A cess is a tax imposed for a specified purpose, while a surcharge is an additional charge on an existing tax for Union purposes. Constitutionally, their proceeds are excluded from the pool of Union taxes shared with the States through tax devolution.

Constitutional basis

• Under Article 270, Union taxes and duties are generally shareable, but any cess levied by Parliament for a specific purpose and any surcharge under Article 271 are expressly excluded.
• Under Article 271, Parliament may increase taxes or duties covered by Articles 269 and 270 through a surcharge for Union purposes; its entire proceeds form part of the Consolidated Fund of India.
• The surcharge power under Article 271 does not apply to the goods and services tax imposed under Article 246A.

Effect on tax devolution

Because cesses and surcharges are outside the divisible pool, States have no constitutionally mandated share in their proceeds through Finance Commission tax devolution.

• Under Article 280, the Finance Commission recommends the distribution of the net proceeds of taxes that are divisible under the constitutional scheme.
• Parliament may determine how cess proceeds are used for their specified purpose, including expenditure benefiting States, but such flows are distinct from an unconditional share in Union taxes.
• Greater use of these levies can reduce the proportion of gross Union tax revenue that enters the divisible pool, even when the prescribed State share of that pool remains unchanged.

Cess and surcharge distinguished

• A cess is linked to a stated purpose and is excluded from sharing under Article 270.
• A surcharge is an addition to an existing tax for Union purposes, and Article 271 assigns its whole proceeds to the Union.

How UPSC asks this