The Indian government is in for a windfall. Over a year after Prime Minister Narendra Modi launched the Swachh Bharat Abhiyaan with a broom and a photo-op, his government introduced a new levy called the Swachh Bharat cess, ostensibly to pay for the project. According to the Revenue Secretary’s estimates, the cess will mop up Rs 3,800 crore by the end of the current financial year, and Rs 10,000 crore in the next financial year. How this money will be used, though, is unknown.
The cess, a form of service tax, came into effect on November 15. It imposes a 0.5% levy on taxable services, effectively raising the service tax rate from 14% to 14.5%. Section 119 of the Finance Act 2015, under which it has been levied, says the cess is meant to finance and promote Clean India initiatives or “for any other purpose relating thereto”. This broad phrasing is just one of the questionable things about the Swachh Bharat cess.
For one, the cess effectively hikes service tax amid already spiralling prices. Secondly, there are concerns about its modalities like not allowing cess paid on services purchased to be set off against cess payable on services provided, leading to a “cascading effect” of cess on cess. Thirdly, the term cess suggests that funds are being collected for a specific purpose, though the levy’s stated purpose is vague. Fourthly, and most importantly, while cleanliness and sanitation are state subjects in the constitutional division of powers, the funds will entirely be at the disposal of the central government.
In its defence, the Indian government has claimed that no price rise effect has been noticed so far. But this ignores the fact that it is early days yet in the life cycle of a levy. The higher cost of a service used to produce goods, as reflected in the higher price of the goods, shows up after some time. And the cumulative effect, where services are used to produce intermediate goods in a multi-stage production process in a heavily ancilliarised industry, like engineering, takes even longer to become evident.
Additionally, the cess paid on services used will remain part of the value of the goods or services produced by using these input services without the benefit of any set-off. To mitigate the cumulative increase in cost of services through the supply chain, the Central government should at least consider extending the set-off or input tax credit mechanism to Swachh Bharat cess. In other words, in keeping with the principles of taxing only value that is added, cess paid should be deductible from the taxable value of the resultant service or product on which cess is payable.
Renaming a renamed project
It’s truly disconcerting that that the levy takes the form of a cess, allowing it to be entirely retained by the Central government, unlike most taxes which have to be shared with the states under Article 270 of the Constitution. To add to this, there is no separate fund in which the proceeds of the cess will be placed to make its use transparent. There is also no timeline for its use. Finally, the use mandated under the new law is so vaguely worded that it could extend to activities that won’t really help the cause of a Clean India. For instance, “promotion of Swachh Bharat initiatives” and “other purposes related thereto” could easily cover travel, quasi-political hoardings and whatever else an imaginative bureaucrat or politician could think up.
Besides, cleanliness and sanitation are state subjects under the Constitution. That is why, in the past, the Union government’s involvement in the area was limited to introducing programmes and giving funds to the states to implement them. This changed as the Indian government’s “Total Sanitation Campaign” – launched in 1999 as a successor to the earlier Rural Sanitation Program – was renamed “Nirmal Bharat Abhiyan” in 2012 and then “Swachh Bharat Mission” in 2014.
Earlier this year, the Finance Act, 2015 had sought to raise funds in the name of the Swachh Bharat Mission by creating a Swachh Bharat Kosh that would receive voluntary contributions. To incentivize contributions, the government has made them tax exempt and qualified them as Corporate Social Responsibility expenditure. The object of the Kosh is to mobilise resources for improving sanitation facilities. But, according to news reports, the Kosh has not been embraced with unreserved generosity. So additional funds are being raised through the Swachh Bharat cess.
Keeping track of funds
Unease about cesses is not new. The 14th Finance Commission had noted lack of transparency and incomplete reporting in accounts of cess funds. Recently, Arvind Subramanian, Chief Economic Adviser to the Central government, too had cautioned against the frequent use of cesses after the introduction of the proposed Goods and Services Tax in a report on “the Revenue Neutral Rate and Structure of Rates for the Goods and Services Tax”. It is notable that though the initial proposal for GST seemed to suggest that there would be no separate cess thereafter, the Constitution amendment bill makes no such stipulation.
Use of the cess mechanism to raise taxes needs to be accompanied by a norm of keeping track of the amount in a fund that is exclusively used for the stated purpose, as in the case of sugar cess (Sugar Development Fund), petrol and diesel cess (Road Development Fund), among others. The purposes for which the funds can be used must also be clearly delineated.
The estimated annual revenue from Swachh Bharat cess is Rs 10,000 crore. But with the existing Swachh Bharat Kosh and a World Bank loan of Rs 10,000 crore for Swachh Bharat Abhiyaan, the question is: did the government really need to levy the cess?
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The cess, a form of service tax, came into effect on November 15. It imposes a 0.5% levy on taxable services, effectively raising the service tax rate from 14% to 14.5%. Section 119 of the Finance Act 2015, under which it has been levied, says the cess is meant to finance and promote Clean India initiatives or “for any other purpose relating thereto”. This broad phrasing is just one of the questionable things about the Swachh Bharat cess.
For one, the cess effectively hikes service tax amid already spiralling prices. Secondly, there are concerns about its modalities like not allowing cess paid on services purchased to be set off against cess payable on services provided, leading to a “cascading effect” of cess on cess. Thirdly, the term cess suggests that funds are being collected for a specific purpose, though the levy’s stated purpose is vague. Fourthly, and most importantly, while cleanliness and sanitation are state subjects in the constitutional division of powers, the funds will entirely be at the disposal of the central government.
In its defence, the Indian government has claimed that no price rise effect has been noticed so far. But this ignores the fact that it is early days yet in the life cycle of a levy. The higher cost of a service used to produce goods, as reflected in the higher price of the goods, shows up after some time. And the cumulative effect, where services are used to produce intermediate goods in a multi-stage production process in a heavily ancilliarised industry, like engineering, takes even longer to become evident.
Additionally, the cess paid on services used will remain part of the value of the goods or services produced by using these input services without the benefit of any set-off. To mitigate the cumulative increase in cost of services through the supply chain, the Central government should at least consider extending the set-off or input tax credit mechanism to Swachh Bharat cess. In other words, in keeping with the principles of taxing only value that is added, cess paid should be deductible from the taxable value of the resultant service or product on which cess is payable.
Renaming a renamed project
It’s truly disconcerting that that the levy takes the form of a cess, allowing it to be entirely retained by the Central government, unlike most taxes which have to be shared with the states under Article 270 of the Constitution. To add to this, there is no separate fund in which the proceeds of the cess will be placed to make its use transparent. There is also no timeline for its use. Finally, the use mandated under the new law is so vaguely worded that it could extend to activities that won’t really help the cause of a Clean India. For instance, “promotion of Swachh Bharat initiatives” and “other purposes related thereto” could easily cover travel, quasi-political hoardings and whatever else an imaginative bureaucrat or politician could think up.
Besides, cleanliness and sanitation are state subjects under the Constitution. That is why, in the past, the Union government’s involvement in the area was limited to introducing programmes and giving funds to the states to implement them. This changed as the Indian government’s “Total Sanitation Campaign” – launched in 1999 as a successor to the earlier Rural Sanitation Program – was renamed “Nirmal Bharat Abhiyan” in 2012 and then “Swachh Bharat Mission” in 2014.
Earlier this year, the Finance Act, 2015 had sought to raise funds in the name of the Swachh Bharat Mission by creating a Swachh Bharat Kosh that would receive voluntary contributions. To incentivize contributions, the government has made them tax exempt and qualified them as Corporate Social Responsibility expenditure. The object of the Kosh is to mobilise resources for improving sanitation facilities. But, according to news reports, the Kosh has not been embraced with unreserved generosity. So additional funds are being raised through the Swachh Bharat cess.
Keeping track of funds
Unease about cesses is not new. The 14th Finance Commission had noted lack of transparency and incomplete reporting in accounts of cess funds. Recently, Arvind Subramanian, Chief Economic Adviser to the Central government, too had cautioned against the frequent use of cesses after the introduction of the proposed Goods and Services Tax in a report on “the Revenue Neutral Rate and Structure of Rates for the Goods and Services Tax”. It is notable that though the initial proposal for GST seemed to suggest that there would be no separate cess thereafter, the Constitution amendment bill makes no such stipulation.
Use of the cess mechanism to raise taxes needs to be accompanied by a norm of keeping track of the amount in a fund that is exclusively used for the stated purpose, as in the case of sugar cess (Sugar Development Fund), petrol and diesel cess (Road Development Fund), among others. The purposes for which the funds can be used must also be clearly delineated.
The estimated annual revenue from Swachh Bharat cess is Rs 10,000 crore. But with the existing Swachh Bharat Kosh and a World Bank loan of Rs 10,000 crore for Swachh Bharat Abhiyaan, the question is: did the government really need to levy the cess?