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Covid cess--India's 10th--could grow cess revenue to over Rs 3 lakh crore

Business Today |
Gunjan Prabhakaran, Partner and Leader
Indirect Tax

28 January 2021

Speculations are rife that the government may levy a Covid cess of around 4 per cent on high income earners to fund the coronavirus vaccination drive

The government might come up with a Covid-cess to compensate for revenue shortfall in economy. Speculations are rife that the government may levy a Covid cess of around 4 per cent on high income earners to fund the coronavirus vaccination drive.

At a time when the government is struggling to manage its fiscal deficit and tide over cash flow issues due to lower collections than budgeted, a Covid cess, if introduced, could provide a much-needed relief to the government by making available sufficient funds to finance vaccination drive without having to dip into its existing revenues, says Gunjan Prabhakaran, Partner and Leader - Indirect Tax, BDO India.

Though the idea may sound plausible in short run, the government should keep in mind past experience when it tried to introduce a surcharge on the super-rich in Budget 2019, and ensure the incremental cess does not drive away investors and their much-needed investments from India, she adds further.

A cess, which is an additional tax levied by the government to raise funds for a specific purpose, is not new to the system. Different types of cess have been introduced and abolished or subsumed over the years. Infact, the government abolished a number of cesses post the introduction of GST.

"There are currently around nine cesses that are being levied by the government as against 42 cesses that have been levied previously (abolished later or subsumed under GST)," highlights Prabhakaran. These include cess on crude oil, health and education cess, road and infrastructure cess, other construction workers welfare cess, national calamity contingent duty, duty on tobacco and tobacco products, the GST compensation cess, health cess of 5 per cent on imported medical devices - in the Finance Bill for 2020-2021.     

Cess is increasingly becoming a preferred source of revenue as Centre doesn't necessarily need to share it with states. The share of cess in total tax kitty increased from 7.9 per cent to 9 per cent in the past two years. The union government collected Rs 2,74,592 crore from cesses and levies in FY19 against Rs 2,14,050 crore in FY18.  

According to Bank of Baroda Economics Research, "With a 4.2 per cent decline in nominal GDP, centre's net revenues are estimated to fall by 6.7 per cent to Rs 15.7 lakh crore instead of budgeted Rs 20.2 lakh crore. On the other hand, spending is likely to increase by 13.3 per cent in FY21 to Rs 30.4 lakh crore."