Health and Education Cess – Budget 2018

Cess is a form of tax and an additional levy by the Central Government to raise funds for a specific purpose. Cess is resorted to only when there is a need to meet the specific expenditure for the public welfare and to be discontinued once the objective is met.

How is cess different from normal tax?

Cess is not the same as normal tax which is collected by the Government such as income tax, Goods and Services Tax, Excise duty etc. Any tax collected from the normal tax goes into the Consolidated Fund of India (CFI) which can be allocated for any purpose. However, Cess is a different form of tax and does may initially get credited to the CFI but has to be ultimately utilized towards the purpose for which it was collected.

For example:

Education cess should be used only for educational purposes. Even if the amount is unspent from a particular cess collection in any year, it should be carried forward and used in the following year and can not be used for any other purpose.

Further, the Cess fund either in full or part need not be shared by the Central Government with  State Governments, unlike a few normal taxes. The government also resorts to Cess as it is easy to introduce, modify and abolish compared to normal taxes as any change in normal tax needs to go through a lot of procedures. While communication regarding Cess can be easily done through a notification to that effect, changes in normal tax require amendments in the law.

Central Government has introduced various cesses and all of them are not computed in the same manner. Few of the examples are Infrastructure Cess on Motor Vehicles – 1 – 4%; Clean Environment Cess – flat of Rs 400 for every tonne of Coal, Education cess on tax amount including surcharge

Education cess in India

Education Cess at 2% was introduced to meet Government’s commitment to providing and financing universalised quality basic education needs of poor people in India as an additional levy on basic tax liability.

While this was helping students to complete primary education, the Government realized the need for access to secondary and higher education as well and through Finance Act 2007 introduced an additional secondary and higher education cess of 1% to fund secondary and higher education cess. Overall education and secondary higher education cess of 3% was charged on all types of taxes.

Health and Education Cess vide Budget/Finance Act 2018

In the Budget 2018, Finance Minister Arun Jaitley proposed various programmes to meet the education and health needs of Below Poverty Line (BPL) and rural families such as improving the quality of education, teachers, digital initiatives, quality education to tribal children [By the year 2022, Government proposed that every block with more than 50% Scheduled Tribe population and at least 20,000 tribal persons, will have an Ekalavya Model Residential School], infrastructure improvement in education, flagship national health protection scheme, set up of more Government hospitals and colleges, Galvanizing Organic Bio-Agro Resources Dhan etc. In order to fund the education and health proposals announced in Budget 2018 as above, a cess was increased by another 1%.

Accordingly, the ‘Secondary and Higher Education cess’ was discontinued and ‘Health and Education Cess’ at 4% on tax (including surcharge) was introduced. The finance minister estimated an additional collection of Rs 11,000 crores with an increase of cess by 1%. Finance Budget 2018 was approved in both parliament houses and received President’s assent on 29 March 2018 and was enacted. Hence, Health and education cess will now be levied from the financial year 2018-19.

How does it impact taxpayers?

Though cess is different from normal taxes from Government’s perspective, it is as good as any tax for the common man as it is only going to increase his outflow. While increased cess on direct taxes increases the tax outflow, cess on indirect taxes may increase the cost of various products in most cases and thereby increasing the cost of living. For eg: The infrastructure cess increased the cost of motor vehicles as companies passed on the additional cess to customers by hiking cars prices.

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