Reining in the fiscal deficit (excess of total expenditure over total revenue) has always been a challenge for the union government especially after the enactment of the Fiscal Responsibility and Budget Management (FRBM) Act, 2003 which requires it to maintain the deficit within a specified threshold.
At the same time, there are certain thrust areas such as education, roads and other infrastructure, telecommunication network in rural areas, exploration of oil and gas etc which mandarins in the finance ministry felt won’t get the desired funds in the normal course of budgeting and deciding allocation. This led them to innovate special taxes such as USO (Universal Service Obligation) levy imposed on telecom service providers, Cess on Crude Petroleum Oil (CPO), Road and Infrastructure Cess (RaIC), Primary Education Cess (PEC), Secondary and Higher Education Cess (SHEC), Education Cess on Imported Goods (ECIG), R&D Cess and so on.
The proceeds from these taxes are credited to the Consolidated Fund of India (CFI) and subsequently transferred to a non-lapsable fund say Universal Service Obligation Fund (USOF) – based on the appropriation approved by Parliament – created in the public account for utilizing exclusively for the purposes for which it is collected. The financing of the underlying activity thus gets shielded from the vulnerabilities associated with normal budgeting exercise.
Prima facie, the idea sounds appealing. But, the big question is: Is it working? Are funds being utilized for the declared purpose? Are the outcomes commensurate with the intent? Are not there better ways of achieving the state objective? To answer these questions, we may look at the reports of the Comptroller and Auditor General of India (CAG) which point towards several irregularities in the management of these special taxes.
The government charges license fee @8% of the adjusted gross revenue (AGR) of service providers that includes 5% as appropriation for crediting to USOF (set up in 2002) and the balance 3% is retained with the general exchequer. For 2018-19, the CAG has noted that out of total collection of about Rs 6,900 crore as USO levy, only about Rs 4800 crore was transferred to USOF implying shortfall of around Rs 2100 crore. Against collection of about Rs 110,000 crore since 2002, the amount disbursed till date is only Rs 54,500 crore. The balance Rs 55,500 crore remains with CFI.
Coming to the Secondary and Higher Education Cess (SHEC), the government started collecting this levy from 2006-07 and until January 2019, a total of about Rs 94,000 crore was collected. The entire amount has been retained in the CFI. In this case, ironically even the public account christened as Madhyamik and Uchchtar Shiksha Kosh (MUSK) was created only in August 2017 (more than a decade after collection started) and has not been operationalised so far.
The R&D Cess Act, 1986 provides for levy and collection of a Cess on all payments made for the import of technology. The proceeds of this Cess was to be disbursed as Grants-in-aid to Technology Development Board [TDB] set up in 1996. During 1996-97 to 2017-18, a total of about Rs 8,000 crore was collected. Of this, close to Rs 800 crore or only 1/10th was transferred to TDB. Furthermore, even as the Cess was abolished from April 2017, it continued to be collected during 2017-18 and 2018-19.
In case of Clean Energy Cess (this is levied primarily on coal produced in the country and imported coal) since 2010-11, the amount not transferred to the designated fund viz. National Clean Energy Fund (NCEF) was about Rs 44,500 crore. Likewise, in case of Road and Infrastructure Cess (RaIC), earlier nomenclature Road Cess (RC), there was “short transfer” of about Rs 72,000 crore in the cumulative amount collected since 1998-99 till March 31, 2018 to Central Road Fund (CRF) – the public account created for the purpose.
In recent years, the government has taken increasing recourse to levy of RaIC. Currently, out of the central excise duty (CED) on petrol of Rs 33 per litre, Rs 18 per litre or 54% comes from the Cess. In case of diesel, out of Rs 32 per litre CED, RaIC accounts for Rs 12 per litre or 37.5%. Considering that unlike other taxes which are part of the divisible pool to be shared with states, the Centre gets to retain all of the Cess which goes to CFI and is available for general use, increasing reliance on this is but natural.
The union government also levies the so called oil industry development (OID) cess currently at 20% ad-valorem on the price that producers of crude viz. Oil and Natural Gas Corporation (ONGC) and Oil India Limited (OIL) get on their supplies (from nominated blocks and pre-NELP exploratory blocks). Collected under Oil Industries (Development) Act of 1974, proceeds from the Cess run into thousands of crore (during 2016-17, these were around Rs 14,000 crore). Though meant for giving a boost to exploration and development, as in other cases, this money remains with CFI.
In short, the irregularities pointed out by the top auditor include short or ‘nil’ transfer of Cess proceeds from the CFI to the dedicated non-lapsable fund in public account set up for specified purpose. In certain cases, the public accounts were not even created long after the government started collecting the tax. In others, it continued to collect even after the same was abolished.
From the above, it is abundantly clear that the purpose for which the Cesses were imposed has not been achieved. One discerns a clear tendency on the part of the government to use them primarily for increasing its ‘general revenue’ and meeting fiscal deficit target. If, an overwhelming share of proceeds (or even the whole of it) from the Cess remain with CFI, what else one should conclude? Or, the dedicated public account where the money has to go (for use in the intended purpose) is not even created, what else one can infer?
Meanwhile, these Cesses continue to inflict damage to the concerned stakeholders who bear their brunt. Look at the impact of 5% USO levy on telecom service providers. In an intensely competitive environment wherein they are compelled to keep the tariff low (this is also in sync with the dire need to make these affordable to consumers – majority of them having low income), such levy has the effect of raising the cost of services and making them unviable. In fact, there is a strong case for scrapping this levy.
This was recognized by none other than the union Telecom minister Ravi Shankar Prasad when he wrote to the finance ministry: “Given that rural tele-density has significantly increased since the time the Fund was set up, it is proposed that USO levy may be reduced from 5% to 3%.The 2% USO levy reduction may be made available to the telecom service providers provided that this amount is utilized by them for carrying out research and development for development and deployment of indigenous technologies in the country.”
Yet, the government continues with status quo the sole reason being easy availability of funds (from USO levy) which can be used for plugging its general deficit.
Look at the RaIC which accounts for a major slice of CED on petrol and diesel and together with cascading effect of VAT leads to a bizarre situation whereby taxes alone account for about two-third of their prices at the pump. The high fuel price contributes to high inflation and higher cost of fertilizers and food. Since, the Government controls their prices at a low level to make them affordable, much of the extra revenue is given back as higher subsidy. To that extent, the revenue gain from Cess (besides other taxes) is imaginary.
Likewise, 20% OID cess on domestic supplies of crude (besides 20% royalty ONGC/OIL need to pay to state government in respect of onshore supplies and 10 – 12% royalty to the Centre on offshore supplies) impacts the viability of producers at a time when their realization from sale has plummeted (courtesy, steep decline in international price of crude).
Despite the Cesses not serving the intended purpose and their negative consequences, the mandarins in the finance ministry appear to be in no mood to say good bye to them. Amidst the current crisis created by Corona – pandemic when the tax collections have been severely impacted and expenditure commitments have ballooned, they may not even entertain any discussion on this.
Nonetheless, there is dire need to put abolition of these special taxes on the high table as these are not only counter-productive and but also make our policy planners and administrators complacent with regard to sustainable ways of balancing the budget. Will the government go on a course correction? One can only wait and watch.