Why are Cess and Surcharge Levied Separately?

Why are Cess and Surcharge Levied Separately?

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Jaya
Jaya Sharma
Assistant Manager - Content
Updated on Jan 9, 2024 13:32 IST

Both cess and surcharge are additional taxes but are different fundamentally. These terms can be confusing for those who are filing their first income tax. Let us understand what these terms stand for and what is the main difference between them. This article will help you understand the reason why cess and surcharge are levied separately.

cess and surcharge

Table of Contents

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.
  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.

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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.

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. 

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. 

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

Income limit Surcharge Rate 
Net income of more than 50 Lakhs and less than 1 crore 10%
Net income of more than 1 crore and less than 2 crores 15%
Net income of more than 2 Crore and less than 5 crores 25%*
Net income of more than 5 Crore 37%*

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

Net income of more than 1 Crore and less than 10 Crores 7%
Net income of more than Rs.10 Crores 12%
LLP/Firms/Local authorities/Co-operative Societies with net income of more than 1 crore 12%

Surcharge on Income Tax For Foreign Companies

Net income of more than 1 Crore and less than 10 Crores 2%
Net income more than.10 Crores 5%

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. 

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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. 

Cess  Surcharge
It is charged for a specific purpose. No specific purpose. 
Each Indian taxpayer has to pay a cess. Individuals with more than 50 lakh and corporations with more than 1 crore pay surcharge.
These funds cannot be used for any other cause other than the specified purpose. The government can use these funds where it deems fit.
No longer charged once the purpose is fulfilled or non-existent. No end date.

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.

      FAQs

      On which taxes are surcharges typically levied?

      Surcharges are most commonly applied to income tax, but they can be levied on other taxes as well depending on the government's policy.

      Can I avoid paying surcharges?

      Tax planning and efficient income management can potentially help reduce your overall tax liability, including surcharges. However, consult a tax advisor for personalized advice.

      Which are the different types of cess levied in India?

      Some common cesses in India include Education Cess, Health Cess, Swachh Bharat Cess, Krishi Kalyan Cess, etc. Each has its own designated purpose and rate.

      How are cess funds utilized?

      Ideally, cess funds are directed towards the specific purpose they were levied for. However, transparency and accountability in their usage can be concerns.

      Will cess ever be discontinued?

      Technically, cesses are meant to be temporary levies. However, some may continue beyond their initial timeframe depending on government discretion and revenue needs.

       

About the Author
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Jaya Sharma
Assistant Manager - Content

Jaya is a writer with an experience of over 5 years in content creation and marketing. Her writing style is versatile since she likes to write as per the requirement of the domain. She has worked on Technology, Fina... Read Full Bio