Centre hogging, mismanaging revenues

The latest report of the Comptroller and Auditor-General of India (CAG) has made some relevant and uncomfortable disclosures about the central government’s increasing tendency to raise revenue through the cess route and the misallocation of such revenues. This has an unhealthy impact on states’ finances. The Centre has levied more and more cesses of different kinds to raise revenues, instead of raising or imposing taxes. Cesses need not be shared with the states while taxes have to be shared to the extent of 41%. Two years ago, cesses made up about 14% of the Centre’s non-GST revenues. They are set to rise to 18% this financial year. It is estimated that the cesses imposed in the budget this year have robbed the states of Rs 1.25 lakh crore. This is against the idea of federalism, which envisages a fair sharing of revenues between the Centre and the states.

The report has also pointed out that the central government retained in the Consolidated Fund of India (CFI) more than Rs 1.1 lakh crore out of the almost Rs 2.75 lakh crore collected in 2018-19 through various cesses, instead of transferring them to the specified reserve funds that Parliament had approved for such levies. This amounts to misallocation of funds. A cess is meant for a particular purpose. When it is used for other purposes, it amounts to misuse. A social welfare cess of Rs 8,871 crore was not used for that purpose. A GST Compensation cess of Rs 40,806 crore was not fully credited to the related fund, and Rs 10,157 crore of the road and infrastructure cess was also not transferred to the concerned fund. Similarly, Rs 2,123 crore of universal service levy and Rs 79 crore collected as national mineral trust levy were not transferred to the relevant funds.

There are other instances, too. They show a cavalier and unprincipled approach to taxation, resource raising and revenue utilisation. A cess is a short-cut which is to be used only rarely. Since the states have only limited power to raise resources, the Centre should minimise its revenue mobilisation through cesses which need not be shared with them. It is not healthy public finance management if the resources are appropriated by one authority. It is worse when the revenue thus raised is not used for the propose specified for it. The CAG has pointed out this wrong trend in the past also. The latest report has said that the wrong practice has continued even after it has been pointed out in successive CAG reports. Cesses are best avoided, and when they are imposed, they should only be used for the purpose for which they are approved by Parliament.