While most governments are accused of failing to deliver what they promise, the current government led by Prime Minister Narendra Modi has at least implemented one item it announced in this year's budget. Starting last week, eating out, travelling and even phone calls have become a little more expensive because of the introduction of a new tax called the Swachh Bharat cess, which aims to raise funds for the prime minister's cleanliness campaign.
The cess will be charged at 0.5% on the bill amount of all taxable services and will be added to the existing Service Tax which is charged at 14%. The government hopes to collect Rs 3,800 crore through the introduction of this tax in the remaining months of the fiscal year ending on March 31, 2016.
Building toilets to end open defecation is just one part of the programme, which was launched last October. Swachh Bharat Abhiyaan is much broader in scope, covering everything from sanitation to hygienic surroundings.
While an additional cess to finance something as basic as clean surroundings might seem like a good move, some are questioning the decision to introduce yet another tax for the already burdened citizen. At the same time, many remain unsure about exactly how it will work.
Tax for cleanliness is a good idea but how much will we end up paying?
In his budget speech this year, Finance Minister Arun Jaitley said that the government could levy a Swachh Bharat cess on certain services to fund the initiative and this tax could range from anywhere between 0-2%. While the government had indicated earlier that it would only be levied on select services, it is no longer the case.
All services availed after November 15 which attract Service Tax will also require Swachh Bharat cess to be paid at the rate of 0.5% on the taxable amount. This implies that, for a bill of Rs 1,000 at a restaurant, consumers will now pay an effective Service Tax of 14.5% instead of 14% earlier.
For instance, service tax is charged in restaurants at the 40% of the final bill amount. Hence, service tax will have to be paid on Rs 400 at the rate of 14.5% now – so one would end up paying Rs 58 now, while one would previously have paid Rs 56.
But it’s called a cess like the educational cess, so shouldn’t it be levied on tax amount instead of bill amount?
Even though the name sounds confusing to many, Swachh Bharat cess is a levy which is meant to be treated like a tax instead of a cess. Indian government charges an education cess on the total tax liability at the rate of 3% which is calculated on the tax payable. Hence, a tax liability of, say, Rs 100 on a total bill of Rs 1,000 would earlier attract Rs 3 (0.03 x 100) as educational cess.
This is different from service tax that is charged on the final bill amount ie Rs 1,000. In June, however, educational cess was subsumed under service tax according to a government notification when the service tax rate rose to 12.36% from 12% on account of additional cess and was further increased to a flat 14%.
The Swachh Bharat cess will be charged along with service tax on the bill amount and added to it instead of being calculated on the tax payable.
Isn’t the government supposed to fund the initiative out of its own money?
The Indian government made a substantial allocation of Rs 3,625 crores for the Swacch Bharat Mission for the financial year ending March 2016 which is a healthy 27% increase over last year’s allocation. Not just this, almost 94% of funds earmarked for the initiative were released by the government in the financial year 2013-'14.
Even though there’s no indication yet that the government will cut its own funding to the initiative, the chatter in the corridors is that the government wants it to be a self-financing initiative rather than put money out of its own kitty each year.
If it’s only about paying extra Re 1 on every Rs 200 worth of services, why are people opposing it?
Opposition to the Swachh Bharat cess began right after it was announced in the budget speech and has carried as critics claim that it is a “terrible idea” to levy a tax to finance an initiative that should come from existing revenues.
Further, only a small fraction of Indians actually pay income tax and corporate tax and some say that the government should try to widen the tax base. Others point out that this idea of taxing all citizens at a flat rate is a regressive taxation system in that it ends up hurting the poor and middle class a lot more than it hurts the rich. Income tax can be termed progressive since its rate changes with the change in income as those earning more are taxed at a higher rate. The government, however, has been intent on increasing revenues through indirect taxes lately.
“The cess is the latest in a series of tax moves that will make the tax system less progressive,” wrote Mint in an editorial. "It is a worry that goes beyond the usual budget calculus or even the denial of revenue to states."
Most consumers are predictably not upbeat about having to pay more for services while states are unhappy fearing that the government will arm-twist them into funding a large part of the Swacch Bharat Mission through their revenues, even though it is a centre-sponsored initiative on paper.