Why is the Government sitting on unutilised cess of ₹3-lakh crore?

At a time when experts and independent observers are egging on the government to loosen its purse strings so that the stalling economy can get a dash-charge from increased public spending, a reading of the Centre’s ‘cess balance’ presents an intriguing picture. The unutilised balance from cesses collected between FY15 and FY20 (budgeted number considered for FY20), and lying in the Consolidated Fund of India (CFI), is a staggering ₹3.59-lakh crore.

This amounts to 21.8 per cent of the budgeted tax revenues for FY20. If the unutilised balance of GST compensation cess — which belongs to the States — is excluded, the balance would still be ₹3.06- lakh crore.

These numbers are derived from a recent reply of the Ministry of Finance to a question raised in Parliament. Of the estimated cess collection of ₹2.76-lakh crore in FY19, only 71 per cent was transferred to the target funds. Similarly, the proportion of cess utilisation was between 54 per cent and 72 per cent between FY15 and FY18. However, a higher 84 per cent of the cess collection of ₹3.16-lakh crore is budgeted to be utilised in FY20.

A cess has been described as a levy for a ‘specific purpose’ in the Constitution. States do not get any share in the cess collected. It is levied over an existing tax and is credited to the CFI. The rules for withdrawing funds from the CFI to spend for the earmarked purpose are governed by specific laws.

The shortfall in transfers has been steeper in some cesses compared with others.

For instance, the cesses collected on education, energy, beedi and infrastructure between FY15 and FY19 were transferred to their respective funds — Madhyamik and Uchhtar Shiksha Kosh (MUSK), Clean Energy Fund, Beedi Workers Welfare Fund and Bharat infrastructure Kosh — only to the extent of 20 per cent, 30 per cent, 34 per cent and 7 per cent, respectively.

The secondary and higher education cess, introduced in 2006-07, which collected up to ₹94,036 crore till FY18, was completely retained in the CFI, according to CAG’s report for FY18. The report also stated that the MUSK fund for the purpose of utilising the secondary and higher education cess was created only in 2017.

Crude cess does worse

The transfers to the MUSK fund began in FY19. But the Revised Estimates indicate that only 63 per cent was transferred in FY19 and the budgeted transfer in FY20 is 68 per cent. Worse are crude oil cess and research & development (R&D) cess, for which there doesn’t seem to be any target fund.

Of the ₹8,077 crore collected as R&D cess from 1996-97, only 9.64 per cent was disbursed to the Technology Development Board. Also, according to the annual report of the Oil Industry Development Board, of the cumulative cess of ₹1,89,219.91 crore collected up to March 31, 2018, just ₹902 crore, or less than 1 per cent, was transferred to the Board.

A few cesses such as Krishi Kalyan Cess, Primary and Education Cess, Sugar Cess and Swachh Bharat Cess, however, have witnessed higher utilisation levels — above 75 per cent — between FY15 and FY19.

‘No room to reduce cess’

So what happens to the unutilised balance? “The unutilised funds are lying in the CFI because the cess cannot be utilised for any other purpose,” says Sushanth Hede, Economist at CARE Ratings.

Adds Madan Sabnavis, Chief Economist, CARE Ratings: “An unutilised fund is like cash balances built up with Central and State governments, which are used ultimately to finance fiscal deficit.”

However, Kruthi Shah, Economist at Emkay Global Financial Services, says: “A government with such a low tax buoyancy has no room to reduce the cess.” But she points out that the levy of such cesses (despite high balances) not only impacts the States’ revenue but also adds to the inflation.

The Finance Ministry’s defence, as put out in the reply to the parliamentary question, is that the cess released to specific schemes through a dedicated reserve fund depends on the absorptive capacity of the department in a year.