CAG And The Mystery Of The Unspent, Untransferred Cess

Are Indian governments utilising the cess or specific purpose tax they collect from citizens for the right purpose? A report by the Comptroller and Auditor General raises several concerns about this. The report points to deficiencies in transfer and utilisation of cess and in one case says a particular cess was levied and revenue collected even after it had been abolished.

For instance, the CAG report on the union government's accounts for financial year 2017-18, states that Rs 94,036 crore was collected as Secondary and Higher Education Cess since 2006-07 but continues to be retained in the Consolidated Fund of India. A separate fund, Madhyamik and Uchchtar Shiksha Kosh, was created in August 2017 but remained unoperationalised through FY18. The CAG had raised this issue in its report on the government's FY17 accounts as well.

In its report for 2016-17, the CAG had said, “Unlike the creation of Prarambhik Siksha Kosh in the case of primary/elementary education cess, for the SHEC (Secondary and Higher Education) neither a fund was designated to deposit the proceeds of SHEC nor were schemes identified on which the cess proceeds were to be spent.”

Since a cess is an additional tax levied by the government to raise funds for a specific purpose, revenue collected via it can only be spent on that purpose and must be maintained in a separate fund.

A perusal of union budget documents shows that they do not mention the utilisation of proceeds collected under this cess since 2006. There is no mention of the Rs 94,036 crore in the accounts and the opening balance for the fund in 2018-19 is shown as ‘nil'. Allocations have been made to two education departments for the cess estimated to be collected in FY19, after which the closing balance is shown as nil.

In comparison, the Central Road and Infrastructure Fund, also based on a cess, shows an opening balance of Rs 10,250 crore in 2018-19. Allocations worth Rs 1.03 lakh crore have been made from the amount estimated to be collected as cess in the ongoing financial year. The documents show the closing balance at the end of the year as Rs 10,250 crore.

So it's not clear what happened to the Rs 94,036 crore, whether it was spent in previous years and what it was spent on.

“It is alarming that fiscal accounting conventions have been disregarded in this way,” Indira Rajaraman, an economist and a member of Thirteenth Finance Commission, told BloombergQuint.

An email sent to the Ministry of Finance spokesperson and Secretary of Ministry of Human Resource Development did not elicit a response.

Underutilised Cess

The CAG report also points out that the union government collected Research and Development Cess worth Rs 8,077 crore between 1996-1997 and 2017-18, but transferred only Rs 779 crore to the Technology Development Board (TDB). After creation of TDB in 1996, the money collected through R&D cess had to be disbursed as grants-in-aid to the board, the CAG said.

R&D cess was levied on all payments made for import of technology, and was abolished April 2017 onwards. And yet, the report states, that Rs 191.41 crore and Rs 1.14 crore was collected by the government during 2017-18  and 2018-19 (September).

Article 270 of the Indian Constitution allows exclusion of cesses from divisible pool because the proceeds are used for a specific purpose, tax lawyer Mukesh Butani, founder of BMR Legal, told BloombergQuint. If proceeds from cess are not utilised, there is a breach of constitutional commitment, he added.

Short Transfer Of Cess

The auditor also noted there was incomplete transfer of more than Rs 1 lakh crore collected under various cesses from the Consolidated Fund of India to dedicated funds, as of March 2018. Proceeds from each cess are first collected in the Consolidated Fund of India, and then transferred to the dedicated fund for that cess from where the money is allocated and spent.

According to a government official, who spoke on the condition of anonymity, said the transfer to the dedicated fund for the cess, needs to be done only if there is an expenditure requirement for the purpose for which the cess was imposed.

Reiterating the purpose of and process of a cess levy, NR Bhanumurthy, a professor at National Institute of Public Finance and Policy, said the funds collected through a cess need to be used for a dedicated purpose for which it was imposed, and that could be a reason the CAG has red flagged the issue.