Why are Cess and Surcharge Levied Separately?

Table of Contents

• Difference between cess and surcharge
• What is Cess?
• What is Surcharge?
• Why Cess and Surcharge are seperately charged?

Difference Between Cess and Surcharge

Before understanding what is Cess and Surcharge, let us learn the difference between cess and surcharge. Do note that both cess and surcharge are a part of the Consolidated Fund of India. Both are not a part of income tax. However, these cess and surcharge are separately levied. Let us understand the difference. 

What is Cess?

Cess is the additional tax collected as funds for a purpose. This tax is collected for funding different sectors and programs. It is kept in the Consolidated Fund of India before it is transferred to dedicated accounts. Indian government charges the following six types of cess:

1. Primary Education Cess: This targeted customs and excise levy directly builds schools and equips them with resources, ensuring every child in India enjoys access to basic education.
2. Secondary Education Cess: Invest in tomorrow's workforce by empowering colleges, universities, and scholarships. Your income tax contribution fuels higher education and unlocks talent across the nation. Those who further want to learn about income tax in more detail can check out CCA Institute of Professional Education's Income Tax course. 
3. Cess on Crude Petroleum Oil: Every tonne of crude oil fuels road and highway projects through this dedicated levy. This strategic infrastructure investment unlocks rural development and economic potential.
4. Road Cess: With every liter of petrol and diesel, a 1% surcharge paves the way for smoother, more efficient national highways, connecting communities and boosting economic activity.
5. NCCD on Tobacco: This targeted tax on tobacco products strengthens national resilience against disasters. The National Calamity Contingency Duty generates vital funds for relief and preparedness efforts, safeguarding communities.
6. Education cess on Imported Goods: Turn imports into an investment in the future. This 3% customs duty surcharge directly contributes to the Sarva Shiksha Abhiyan, promoting universal elementary education and fueling the next generation's knowledge.
7. GST Compensation Cess: This is a temporary levy added to certain goods and services under the GST regime. Its main purpose is to compensate states for any potential loss of revenue they might experience due to the implementation of GST. It was initially meant for five years from July 1, 2017, but the deadline has been extended until June 30, 2026. Certificate Course on GST is a great course for those who want to learn more about GST compensation cess since it can be complicated to understand on your own. 
   

Please note that Krishi Kalyan Cess, Swacch Bharat Cess, Clean energy cess and Cess on Tea, sugar and jute are collectively levied as a part of GST w.e.f. 1st July 2017. Also note that cess is not a part of income tax slabs since income tax is levied on income earned by individuals. The cess is a part of the Consolidated Fund of India which is collected till the time it is used for serving a specific purpose. Once the purpose is fulfilled, cess is withdrawn. These funds cannot be used anywhere else. 

Unlike other taxes, cess is levied in addition to current tax. Suppose, you have to pay 25% as income tax. Now, your education cess will be an additional 2% to 25%. This means you are paying 25% and 2% on 25% which is equal to 25.5%. Each Indian taxpayer has to pay for cess.

Features of Cess

Cess is a type of additional tax that has the following features:

• A cess is a specialized tax imposed for specific developmental or welfare objectives.
• Unlike regular taxes, authorities legally earmark cess collections for predetermined purposes.
• Cess revenues are not accumalated into the general consolidated fund but go to dedicated funds.
• Government calculates cess as a percentage of tax payable or income earned.
• They strictly allocate the resulting revenue to designated sectors.
• Examples include education cess, health cess, and infrastructure development cess.
• This purpose-driven taxation ensures dedicated funding for priority national projects.
• The focused nature makes cess more politically acceptable than general tax increases.
• Most countries treat cess as a temporary measure, though some continue indefinitely.
• Legal frameworks for cess include accountability mechanisms to ensure proper fund utilization.

What is Surcharge?

The surcharge is also a type of additional tax on the cost of goods and services beyond initially quoted prices. It is added to the existing tax and is not included within the stated prices. It is an indirect method to pass costs to consumers since there is no effect on the prices of goods and services. Fundamentals of Taxation is a good course to understand the different types of taxation from the beginning

Once the consumer purchases the item, sellers calculate the surcharge. This fund is also the part of Consolidated Fund of India. There is no particular purpose for charging a surcharge. Government can use these funds anywhere it is needed. Individuals with more than 50 lakh and corporations with more than 1 crore as taxable income pay a 15% surcharge. 

Features of Surcharge

The following points highlight the features of the surcharge:

• A surcharge is a type of additional tax that is imposed on an already existing tax liability.
• The surcharge is not calculated based on income. Rather, it is calculated as a percentage of the original tax amount
• Surcharge is levied on high-income individuals or corporations.
• They add a progressive element to taxation without changing the basic tax rate structure.
• Authorities often introduce surcharges to address specific fiscal challenges or revenue shortfalls.
• Sometimes, the surcharge is levied as a temporary measure during financial crises, while others become permanent.
• Surcharges generally do not qualify for deductions or exemptions.
• They serve as efficient revenue generators for governments.
• Examples include income tax surcharges of 10-15% for individuals above certain income thresholds.

Surcharge on Income Tax For Individual/ Artificial Judicial Person/HUF/AOP/BOI

Subject to change. As per the budget 2022, restrict the surcharge to 15% for AOPs that only have companies as members. This will be applicable to AOPs having a net income of more than 2 crores.

Surcharge on Income Tax For Domestic Companies

Surcharge on Income Tax For Foreign Companies

The surcharge is not a part of income tax since privileged classes have to pay it. In a way, it shifts the tax burden from the middle class to those who can afford to pay such funds. 

Why are Cess and Surcharge Charged separately?

Cess and surcharge are two types of additional charges that governments often impose on taxpayers, and they are charged differently due to their distinct purposes and applications:

1. Cess:

• Purpose: Cess is typically levied to raise funds for a specific purpose or project. For example, a government might impose an education cess to fund educational initiatives.
• Usage of Funds: The funds collected through cess are earmarked for their intended purpose and cannot be used for anything else. This ensures that the money raised is spent on the specific cause for which it was collected.
• Temporary Nature: Cess is often temporary and is discontinued once the specific goal for which it was levied is achieved.

2. Surcharge:

• Purpose: A surcharge is generally levied as an additional charge on an existing tax. It is used to collect more revenue, often from higher-income groups.
• General Revenue: Unlike cess, the revenue collected from a surcharge goes into the general pool of government funds. It can be used for any purpose, not just the one for which it was originally collected.
• Progressive Taxation: Surcharges are often used as a tool for progressive taxation, where higher-income individuals or entities pay a higher rate, helping to reduce income inequality.