Cess On Income Tax: Types, How To File And Calculate

The Government of India collects several general and cess taxes to fund several welfare projects and social programs. They use the general taxes to fund any sort of government-run development activity. However, collections from cess on tax go towards funding specific improvement programs only.  Read on to know about what is cess tax and what are its purposes!

What is Cess on Income Tax?

The Government of India imposes a cess on income tax to raise funds for specific purposes. For instance, cess on road and infrastructure tax is used to fund the maintenance of roads and other infrastructures. However, these are not regular revenue sources as the government can discontinue them once the purpose of funding a particular project gets fulfilled.

Usually, the government imposes this tax to develop different sections of our economy or to fulfil specific social causes. The funds collected from cess on tax get deposited in the Consolidated Fund of India (CFI) like other types of collected taxes. However, it is allocated only to fulfil the specific purpose for which it was levied.

Rate of Cess on Income Tax

Health and education cess at 4% is payable on the amount of income tax plus surcharge(if any). Health and education cess is applicable in case of all assessees i.e. individuals, HUF, AOP, BOI, Artificial Juridical Persons, firms, local authorities, co-operative societies and companies.

How to calculate cess on Income Tax?

Let us understand how to calculate health and education cess on income tax with the help of an example:
Suppose an Ms Anna has an income of Rs 10 lakh and her total tax payable comes to Rs 2 Lakh. Then, the cess would be calculated on the tax amount of Rs 2 lakh as under: 

Purpose of Collecting Cess on Income Tax

Cess on Income Tax is collected to allow the government to conduct education programs and schemes that can help improve the country’s educational quality and access. The money received by the government will be used for the following purposes:

• The cess is used to pay for students’ mid-day meals.
• It is also used to establish government-sponsored schools and institutions.
• This money is also used to pay the salaries of employees in government schools and colleges.
• The government can also use this money to establish education loans at lower interest rates for students to assist them to pay for higher education.
• It can also be used to fund special programs such as the Rashtriya Madhyamik Shiksha Abhiyan, which attempts to make secondary education more affordable.
• The funds could also be utilised to help renowned institutes such as IIT and IIM open more branches in states that do not currently have access to these institutions.
• If the government intends to increase the number of educational facilities for children, the money raised through the education cess can be utilised to pay for the programs.
• It helps the government to provide and finance quality health services. 

What Are the Different Types of Cess Taxes?

Now that you know what is cess in income tax, take a look at the different types of cess tax for a better understanding:

Health and Education Cess

Financial Minister Arun Jaitley introduced the health and education cess in the 2018 Union Budget. It is levied on your income tax to meet the educational and health needs of people belonging to the BPL (below poverty line) category. The Union Government takes initiatives to improve educational infrastructure and quality through digitalisation, appoints qualified teachers, develops school buildings, etc. 

Apart from that, the government uses the funds generated from cess to improve national health schemes for rural and underprivileged communities. Government used to levy a 3% education cess on income tax. However, from FY 2018-2019, a 4% of cess is levied for improvement of health and education services.

Road and Infrastructure Cess

This cess is levied on specific excisable and imported goods like high-speed diesel, petrol, etc., under sections 109 and 110 of the Finance Act, 2018. The Government of India imposes the road and infrastructure cess on four-wheelers and other heavy vehicles mandatorily. Owners of two-wheelers, three-wheelers, electrically operated or hybrid vehicles, etc., are excluded from paying this cess. As per the recent update, a road and infrastructure cess of Rs 1 is levied per litre of high-speed diesel and petrol.

GST Compensation Cess

You need to pay a GST compensation cess on goods of demerit and luxurious categories. Every Indian taxpayer is liable to pay this cess unless you have opted for the GST composition scheme or are exporting the notified goods only. 

Construction Workers Welfare Cess

The construction workers’ welfare cess is implemented under sections 3(1) and 3(3) of the Building and Other Construction Workers’ Welfare  (BOCWW) Cess Act, 1996. As per the provisions, employers need to pay 1% of the construction cost to the Government as BOCWW cess.

Cess on Crude Oil

Natural gas and crude oil produced from domestic oil blocks are subjected to ad valorem cess. The Central Government imposes a 20% cess on crude oil and natural gas for the development oil industry.

National Calamity Contingent Duty

The Central Government imposes NCCD or National Calamity Contingent Duty on cigarettes, chewing tobacco and pan masala. Moreover, the government proposed to increase the NCCD on specific cigarettes by 16% in the 2023 Budget.

Difference Between Cess and Other Taxes

The government imposes cess charges on taxes like income tax, GST, excise duty, etc., which constitutes the basic difference between cess and tax. Scroll down to check out some more differences between tax and cess:

• Government collects taxes to fund multiple employment schemes and welfare programs. However, cess is charged against a particular improvement or development program and the amount collected from cess is strictly to be used for that purpose. If the amount goes unspent for a particular year, it is carried forward to the next financial year. 
• There are certain taxes that the Central Government needs to share with the state government. However, in the case of a cess charge, this rule is not applicable. 
• Government can easily introduce and abolish cess charges, but general taxes need IT law amendments for initiation. 

Final Word

The government charges cess on general taxes to fund various programs and schemes. Though it is not a regular source of revenue, the government can implement cess charges to fund emergencies like social issues, relief funds for natural disasters, and so on. Every taxpayer needs to pay a cess charge along with his/her payable direct taxes. However, in the case of GST, sales tax, or service tax, the producer is liable to pay the cess charge.