Cess & Surcharge, Meaning, Types, Differences, UPSC Notes!

Cess and surcharge are additional taxes levied by the government to raise revenue for specific needs or to tax higher income groups. While they may seem similar, they differ in purpose, calculation, and revenue sharing. Cess is charged for a specific purpose like education or health and is not shared with states, whereas surcharge targets high-income taxpayers and may be shared with states. 

Cess and surcharges are essential topics for the UPSC Exam. They cover a significant portion of the Economics subject in the General Studies Prelims syllabus and the General Studies Paper 3 Mains syllabus. 

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What is the Meaning of Cess?

Simply put, cess is a type of tax levied by governments to raise funds. The funds raised from a cess can only be used to finance that particular purpose for which it was levied. There is a legal obligation for the government to use cess funds for a particular purpose only. For example, the Swachh Bharat Cess levied by the Union Government in FY 2015-16 mandates that all proceeds collected from it should only go for financing the Swachh Bharat campaign and projects.

The biggest difference between cess and surcharge is that cess is levied on all classes of taxpayers. Even if you are in the lowest tax slab, you will have to pay cess. Proceeds collected from the cess are deposited in the Consolidated Fund of India. The government can withdraw the cess amount from the Consolidated Fund account and use it for the specific purpose mentioned. 

Usually, governments will only levy a cess if they have a very important and specific purpose. A cess is levied only until the fulfilment of objectives related to that purpose. The cess becomes inoperational or dormant after completion of the said purpose. Cess is a unique type of tax levied on income plus surcharge and income tax. It means that if a person is earning ₹ 10 lakhs per annum and he/she comes in the tax slab of 20%, health, and education cess is charged at the rate of 4%. In this scenario, your effective income tax rate will be 20.8%, i.e., {20%+ (4%of 20% income tax)} 

Read here to learn everything about the concepts of Revenue Receipts here!

What are the Different Types of Cess?

Here are various types of cess levied in India: 

• Cess on exports: It is levied by the government to raise funds to boost exports and reduce the current account deficit. 
• Road and Infrastructure cess: As the name suggests, this type of cess is for developing road infrastructure in various parts of the country. The government uses the proceeds to build new roads or maintain the existing ones. It is imposed on the sale of petrol and diesel, and the current rate is around ₹ 1.50 per litre.
• National Calamity Contingent Duty on Tobacco and Tobacco Products: The government of India, in budget 2023, has increased this cess by 16%. 
• Health and Education cess on Income Tax: The rate of health and education cess is 4%. It is levied on all taxpayers irrespective of the income slab. 
• Construction Workers Welfare Cess: The proceeds coming from this cess will be used to launch welfare schemes for construction workers. The rate of this cess is 1% of the total cost of construction. 
• GST Compensation Cess: As per the GST Act 2017, a GST cess would be imposed on luxury or sin goods. The proceeds of this cess would be transferred to state governments as compensation for the loss of revenue that they had to incur after the introduction of GST. This cess will be collected up to 31st March 2026, after which it may be replaced or merged with other targeted cesses such as Health or Clean Energy Cess (proposed).
• Krishi Kalyan Cess: Funds generated from this cess would be used for the development of agriculture sectors. The rate of Krishi Kalyan Cess is 0.5% of the total value of all taxable services. It was abolished after the introduction of GST. 
• Swachh Bharat Cess: It would have been used to finance cleanliness projects. This cess was imposed on 1st September 2015 and abolished after the operationalisation of GST. 

You can access the Goods and Services Tax notes for UPSC here!

Examples of Cess

Now that you know the meaning and types of cess levied in India. Let's take a look at an example of cess as it will clear your understanding of the concept. We will consider the health and education cess, which is levied on all taxpayers as a direct tax. The current rate of health and education cess stands at 4%. 

Suppose an individual is earning a certain income subject to taxation as per the highest tax slab, i.e., 30%. Hence, his/her effective income tax will come out to 31.2% {30%+(4% of 30% personal income tax rate)}. If the income of the person is ₹ 10 lakhs, the total taxable amount will be ₹ 3,12,000 (considering that there are no deductions).

Read more about the Corporate Tax System of India!

It is also tax levied on taxpayers earning above a certain income. Unlike cess, it is not applicable to all taxpayers. Only those taxpayers that breach the income limit defined for surcharge will have to pay this tax. Proceeds from the surcharge are free from any restriction, and governments can use them for whatever reason they want. 

Another unique thing about a surcharge is that it is levied only on the taxable amount only and not the total income. Suppose a person earns ₹ 60 lakhs per annum. The total tax liability of the person comes out to ₹ 15 lakhs. Hence, in this scenario, the surcharge will be levied only on ₹ 15 lakhs and not ₹ 60 lakhs. 

The minimum threshold for levying a surcharge is ₹ 50 lakhs. An individual shall be subject to surcharge provisions only if his net revenue crosses ₹ 50 lakhs. For companies, this limit is ₹ 1 crore. Given below are the different surcharge rates for an individual entity:

Here is a comprehensive guide on Taxation in India

Examples of Surcharge

Here is an example of comparison of levy of surcharge between two individuals earnings of more than ₹ 50 lakhs and less than ₹ 50 lakhs respectively:

Study the Article Central Board of Direct Taxes here.

Here are some differences that will help clear your misconception on cesses and surcharges:

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What are the Similarities Between Surcharge and Cess on Income Tax?

Although there is some difference between surcharge and cess, both also have certain similarities between them with respect to their structure and functioning. Here are some similarities between surcharge and cess: 

• Only the Union Government is allowed to levy both cess and surcharge. State governments or local bodies do not have the power to levy either surcharge or cess. 
• The proceeds collected from both cess and surcharge will be deposited in the Consolidated Fund of India. The government can withdraw funds from the account and use it for appropriate purposes. 
• Proceeds of both cess and surcharge will not be shared with the states. It is not a part of the divisible pool of taxes. 

Know about the Direct Tax Code of India!

What are some of the Issues Related to Cess and Surcharge?

Both cess and surcharge have enormously benefitted the Union exchequer. As per budget estimates, the total amount collected from cess and surcharge in 2022-23 stands at more than 5 lakh crores. Given the benefit, there has also been a steady increase in the number and rates of cess and surcharges. However, there are some constitutional and legal issues related to the levying of cess and surcharges. These issues have been discussed below: 

• The proceeds of cess and surcharges are not shared by the Centre with states. Therefore, it deals with the issue of fiscal federalism as it directly impacts the revenue of the states. 
• Article 270 exempts the inclusion of cess and surcharges in the divisible pool of taxes. 
• Larger the amount of cess and surcharge collection, the lower will be the total pool of divisible taxes and eventually reducing the transfer to the states.
• It becomes a bit hard on the part of states as they do not have the power to levy these additional taxes. 
• Moreover, states are deprived of the legitimate share in revenues as the exclusion of cess and surcharge from the divisible pool reduces the net amount to be distributed among the states. 
• Both the Fourteenth and Fifteenth Finance Commissions have advocated for bringing a constitutional amendment bill that will do away with Article 270 and consequently include the proceeds of cess and surcharge as well in the net divisible pool of taxes. 

Read this Article on Value Added Tax.

How can we Address the Concerns Regarding Cess & Surcharge on Income Tax?

Here are key measures and reforms suggested by experts and recent commissions to address persistent concerns regarding cesses and surcharges in India:

Limit Imposition and Scope

• Restrict cesses to union subjects only: The Central Government should avoid levying cesses on matters under the State List (e.g., health, education) as it undermines the spirit of federalism. These should largely remain the domain of states, preserving fiscal autonomy.
• Impose a ceiling: Set a clear limit on total cess collection and avoid exceeding this cap to prevent excessive use.

Enhance Transparency and Accountability

• Clear allocation and periodic review: Clearly outline the purpose and use of each cess/surcharge. Ensure periodic, structured reviews to assess effectiveness, necessity, and compliance with intended objectives.
• Parliamentary and public oversight: Mandate full transparency in reporting and subject cess/surcharge funds to the same parliamentary oversight as other taxes, minimizing misuse and ensuring funds reach target projects.

Limit Duration: Enforce Sunset Clauses

• Temporary, not permanent: Cesses should be imposed for a fixed duration (for example, five years with a one-time extension), and surcharges should be reserved for exceptional circumstances, such as fiscal distress.
• Amend legal provisions: Some experts recommend amending Article 271 of the Constitution, compelling that any cess continuing beyond two years must be shared with the states.

Ensure Equitable Revenue Sharing

• Include excess collections in the divisible pool: States have repeatedly demanded that revenue from long-running or excess cesses and surcharges be included in the divisible pool as per Finance Commission recommendations. This ensures fairer revenue distribution and strengthens the federal structure.
• Rationalize and restructure taxes: Instead of relying on ad hoc surcharges, strengthen the existing tax framework (such as progressive income tax) to reduce dependence on these tools.

Use Only for Intended Purpose

• Accountability for targeted spending: Ensure that funds raised are used strictly for their intended welfare or development objectives (e.g., sanitation, education, infrastructure) and are not diverted to cover general deficits.

Study the Article on Securities Transition Tax here!

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