More reasons on why Swacch Bharat cess is a bad idea

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In the November 16 edition of The Daily Reckoning
I had written a column on the recently implemented Swacch Bharat cess. In this column I had talked about how the Swacch Bharat cess is an example of maximum government.

In today’s column I want to make give more reasons on why the Swacch Bharat cess is a bad idea. Just to recount for readers who hadn’t read the earlier column, on November 6, the Narendra Modi government decided to implement a Swacch Bharat cess. The cess amounts to 0.5% on all services, and has pushed up the effective rate of service tax to 14.5%, from the earlier 14%. The cess has come into effect from November 15, 2015.

Any tax that the central government collects needs to be shared with the state governments. But that isn’t the case with cesses as well as surcharges that it collects. The money raised through cesses as well as surcharges is not shared with the state governments.

In fact, take a look at the accompanying table. In 2013-2014, the cesses and the surcharges collected by the central government amounted to Rs 71,713.7 crore. This formed 8.79% of the total tax revenue remaining with the central government after handing over the share of the state governments.

 

Cesses and surcharges (in Rs crore)2013-20142014-20152015-2016
Total cesses and surcharges71713.7102859.4117460.5
Total tax revenue remaining with central govt after sharing with states815854.2908462.8919842.3
Cesses and surcharges as a percentage of total tax revenue remaining with central govt8.79%11.32%12.77%
Source: www.indiabudget.nic.in

In 2014-2015, the cesses and surcharges collected by the central government jumped by a huge 43.4% to Rs 1,02,859.4 crore. They formed 11.32% of the total tax revenue remaining with the central government after handing over the share of state governments. In 2015-2016, this number is projected to further jump to 12.77%. That’s a jump of close to 400 basis points (one basis point is one hundredth of a percentage) between 2013-2014 and now.

What does this tell us? Since the Narendra Modi government has come to power a greater proportion of the central government’s tax revenue is coming from cesses and surcharges. Take a look at the following table. Look at the last two entries which are in bold (The entries before that are exactly the same as in the earlier table).

Cess and surcharge (in Rs crore)2013-20142014-20152015-2016
Total cess and surcharges71713.68102859.4117460.5
Total tax revenue remaining with central govt after sharing with states815854.2908462.8919842.3
Cess and surcharges as a percentage of total tax revenue remaining with central govt8.79%11.32%12.77%
Total tax revenue of the central govt113873412513911449491
Cess and surcharges as a percentage of total tax revenue 6.30%8.22%8.10%
Source: www.indiabudget.nic.in

In 2013-2014, cesses and surcharges formed around 6.30% of the total tax revenue earned by the central government. After the Modi government took over, the number has jumped to more than 8%.

This has been made possible through several things. In the budget presented in February earlier this year, the finance minister Arun Jaitley had subsumed the education cess and the secondary and higher education cess in central excise duty. “In effect, the general rate of Central Excise Duty of 12.36% including the cesses is being rounded off to 12.5%,” Jaitley had said during his budget speech. The clean energy cess was hiked from Rs 100 to Rs 200 per metric tonne of coal. The existing excise duty on petrol and diesel to the extent of Rs 4 per litre was converted into a road cess. And there was an enabling provision for the Swacch Bharat cess as well.

What is the problem here? The Modi government made a lot of song and dance about increasing the share of state governments in the tax revenues collected by the central government from 32% to 42%. After having done that, it has also managed to increase the amount of money collected through cesses and surcharges which it does not need to share with the state governments.

This goes against the entire idea of cooperative federalism which Narendra Modi had passionately espoused after coming to power. In fact,  the 14th finance commission report released earlier this year had pointed out: “Almost all States have argued that cess and surcharges should form part of the divisible pool, with some suggesting that this should be done if cess and surcharges continue for more than three years.”

The education cess which brings in a bulk of the money collected under cesses, has been around for a very long time. In fact, the Comptroller and Auditor General in a recent report had pointed out that not all the money collected through the education cess went towards education.

As a news-report in The Economic Times points out: “The CAG report said that against the total collection of Rs 130,599 crore as primary education cess, only Rs 119,197 crore was transferred to the Prarambhik Shiksha Kosh in public account from 2004-05 to 2013-14, resulting in a short transfer of Rs 11,402 crore in the Prarambhik Shiksha Kosh.”

The cess on education as well as the new Swacch Bharat cess which will be used for improving sanitation, raises a very important question. If cesses have to be collected for things as important as education and sanitation, what is the government doing with all the actual tax revenue that it is raising? The tax revenue is essentially being used to finance what we can safely call maximum government. While Narendra Modi had promised to change that, up until now he has operated more or less similarly like the Congress governments before him.

For a cess to be effective it is important that it be ring fenced properly. Take the case of the cess on diesel implemented by the Atal Bihari Vajpayee government to finance the national highway development programme. It was a proper ring-fenced cess where there was total clarity of what the money collected under the cess will be used for.

In comparison, the definition of the Swacch Bharat programme remains very vague and given that it will be very difficult to ring-fence it properly. Also, it needs to be asked how effective can a central government be in implementing a cleanliness and sanitation programme at the local level throughout the country. And given that wouldn’t it make more sense in sharing the money raised with state governments?

To conclude, in order to woo foreign investors to invest in India, the finance minister Arun Jaitley has been talking about a fair and predictable tax regime. In fact, at the 11th Indo-US Economic Summit in September earlier this year he had said: “We can evolve into fairest and predictable taxation regime in India.”

How about offering a fair and predictable tax regime to the Indian tax payer as well, Mr Jaitley?

The column was originally published on The Daily Reckoning on Nov 19, 2015

Why the Swacch Bharat cess is a terrible idea

Fostering Public Leadership - World Economic Forum - India Economic Summit 2010
The government announced a new Swacch Bharat cess, yesterday. The cess will amount to 0.5% on all services, pushing up the rate of service tax to 14.5%, from the current 14%. The cess will come into effect from November 15, later this month.

As the press release announcing the decision said: “Swachh Bharat Cess is not another tax but a step towards involving each and every citizen in making contribution to Swachh Bharat…The proceeds from this cess will be exclusively used for Swachh Bharat initiatives.”

This decision is in continuation with something the finance minister Arun Jaitley had announced in the budget speech he made on February 28, earlier this year. As Jaitley had said on that occasion: “It is also proposed to have an enabling provision to levy Swachh Bharat Cess at a rate of 2% or less on all or certain services if need arises. This Cess will be effective from a date to be notified. Resources generated from this cess will be utilised for financing and promoting initiatives towards Swachh Bharat.”

Thankfully, the government has resisted the temptation to increase the rate of service tax by 2%, through the cess route and settled at 0.5%.

There are multiple reasons why this is a bad decision. As the press release said: “Swachh Bharat Cess is not another tax but a step towards involving each and every citizen in making contribution to Swachh Bharat.” What this clearly tells us is that the Swacch Bharat initiative is an important initiative for the government, as it should be.

And given that, it should be financed out through the primary revenues of the government and not through a cess. If the Swacch Bharat initiative is deemed to be important then it should have first claim on the revenues of the government and shouldn’t be financed through a cess.

Second, any cess essentially ends up taxing the same set of people again. Over the years, the government has made very little effort in trying to expand the tax base by simplifying the tax system as well as cracking down on a large set of Indians who do not pay any tax. The annual report of the ministry of finance for 2014-15 puts the total number of income tax assesses in 2013-2014 at 4.7 crore. These includes individuals, families, trusts and corporates. Given a population of close to 125 crore, what this clearly tells us is that not many Indians pay income tax. And this is something that government needs to improve on, instead of taxing the same base over and over again.

Third, any new tax (as a cess is) adds to the complication of the tax system and this keeps people away from paying tax. Further, in the Indian case, a cess tends to be more of a permanent nature than ad hoc as it should be.

Take the case of the education cess on income tax. It has been around for a while now raising the question that isn’t education important enough to be financed out of the primary revenues of the government.

Fourth, while the government has come up with a Swacch Bharat cess, it is wasting thousands of crore on keeping loss making public sector enterprises alive.

Let’s take the example of Mahanagar Telephone Nigam Ltd(MTNL) which offers internet and telephone services in Mumbai and Delhi.

During the course of 2014-2015(the period between April 1, 2014 and March 31, 2015) the company’s income was at Rs 3,400 crore. Its expenditure on the other hand stood at a much higher Rs 5,284 crore. The government(or rather the tax payer) bore the loss of around Rs 1,900 crore.

Or take the case of the government owned airline Air India. The company has accumulated losses of Rs 20,000 crore. The airline keeps making losses. The government keeps putting more and more money into it.

As this August 2015 news-report by PTI points out: “The Finance Ministry today sought Parliament’s nod for making an additional equity infusion into Air India worth Rs 800 crore, less than half the amount sought by the Civil Aviation Ministry for the national carrier.” Thousands of crore have already been infused into Air India. And with so much money going towards such lost causes, it is not surprising that the government has had to introduce a new Swacch Bharat cess.

Fifth, the government can easily finance Swacch Bharat by selling the shares it owns in Axis Bank, Larsen and Toubro and ITC, through the Specified Undertaking of Unit Trust of India (SUUTI). These shares as on November 6, 2015, were worth Rs 53,472 crore. Some portion of these shares can be sold every year to finance Swacch Bharat. At the end of the day what is strategic about the government holding shares in ITC, a company which earns a major part of its revenue through selling cigarettes? The SUUTI’s holding in ITC is worth Rs 30,210.7 crore.

Sixth, by levying a cess for Swacch Bharat, the government is taking the moral incentive out of the equation. As Nitin Pai of the Takshashila Institution puts it: “Levying a cess dilutes the moral incentive that a borderline conscientious citizen faces. Instead of a gnawing feeling when she sees garbage in public places, the marginal citizen is likely to feel the same-old, “I’ve done my part but the government is not doing its job properly.””

Once all these reasons are taken into account the Swacch Bharat cess is a stupid idea. The Narendra Modi government could have done better than this.

(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)

The column originally appeared on Huffington Post India on Nov 7, 2015