During the 2021-22 Union Budget speech, Union Finance Minister Nirmala Sitharaman announced yet another cess — an Agriculture Infrastructure and Development Cess of Rs 2.5/litre on petrol and Rs 4/litre on diesel.
At first glance, this just means that your commute got dearer. But scratch beneath the surface and you’ll realise that cesses such as these are gnawing away at India’s federalism. Here’s how.
The divisible pool comprises taxes like corporation tax, taxes on income, customs, union excise duties, etc. It is called so because this pool of money gets ‘divided’ between the Union and the State governments through a formula recommended by the Union Finance Commission.
In contrast, the money that union governments raise by levy of cesses and surcharges is not shared with the states. Cesses are earmarked taxes levied for specific purposes to provide necessary financial impetus to a particular sector/area. Surcharges are additional charges or taxes levied on existing taxes. A surcharge is calculated on payable tax, and not on income generated. Over the last few years, the union government has been increasingly relying on both cesses and surcharges, resulting in lesser resources being transferred to the states.