Swachh Bharat Cess – Did we need another levy?

On November 6, 2015 the Central Board of Excise and Customs notified the Swachh Bharat Cess as applicable on services w.e.f. from November 15, 2015. Effectively this takes the service tax rate from 14% to 14.5%. The levy itself is not news really as the Finance Minister had mentioned it in his budget speech and in fact the proposed levy was 2%. However, the manner in which the levy was introduced and implemented raises many questions not to mention the fact that if we are going to have a cess for education and cleanliness, then what exactly does the government do with actual taxes!

Before I dive in, it is important to distinguish between a cess and a tax. A cess in my opinion is a specie of tax [per contra a majority in State of West Bengal v. Kesoram Industries Ltd., (2004) 10 SCC 201 held that a cess can also be a fee], only unlike a tax it is collected for a specific administrative expense such as health, education, or in the present case cleanlinessMoreover, a cess is ideally levied on the tax and not as an increment of percentage of an existing tax. That said, it can be levied as an increment of an existing tax [See Shinde Brothers v. Dy. Commr., Raichur, AIR 1967 SC 1512, para 39, per Hidayatullah, J.]. 

A tax on the other hand is general and could be used by the Government for any purpose within the bounds of legislative and executive capacity. Generally cesses are levied for limited periods and when the target for the specified objective is realised, the levy of cess is stopped. Of course, the ever growing population in India and the poor delivery mechanisms ensure that we fail to provide basic education to all children. As such the education cess has been on the books for a while as I am quite certain would the Swachh Bharat Cess. Of course in the present case it does not help that the government has not marked specific projects and the monies collected in the name of the Swachh Bharat Cess are going into the Consolidated Fund of India to be disbursed later for projects the government wants to promote.

The first issue I have with the Swachh Bharat Cess is the playful terminology and the intended aim. As stated earlier, commonly understood, cess is levied on an existing tax. For example, 3% of your income tax is the amount you have to pay as education cess. To levy cess as an increment of an existing tax is nothing more than simply increasing the rate of an existing tax. It is a round about way of reaching the same place. Some would argue that when a cess is levied as an increment of an existing tax, the increased component is directly earmarked for a particularly initiative and the remaining remains open for general use. While attractive in its simplistic appeal, the argument still does not explain why not a cess of ‘x%’ but an increase of an existing tax by ‘y%’. Loyalty to terminology, especially in areas of taxation, is something I believe is very desirable.

The second issue is the way cesses are being put in place in India. A cess has to be an emergency measure for an unforseen eventuality or administrative expense. Cleanliness in general or building toilets, promoting awareness about hygiene and health, proper waste management etc., in my view are not unforeseen and are in fact part of our Constitution. So I wonder why a cess and not just a standard rate of tax, maybe higher than the present one to include all the cesses. To my mind the answer is that these cesses are political measures. For instance if the tax rate is standard and there is say a 30% tax then the government of the day can do as it pleases with the 30% collected nationally and depending on the mindset of the government, the budget could lean in one of many directions. However, a cess creates an earmark, where certain monies are locked in. Thus, a future government has three options – remove Swachh Bharat Cess and be politically targeted in aiding and abetting uncleanliness or let the cess be in place despite cleanliness probably not being its top priority or just introduce a new cess for its agenda. Most of the times, the government will choose door number 3.

Another problem with the Swachh Bharat Cess has been the hurried notification and that too on the Diwali weekend. Obviously it caused resentment in the industry and amongst tax firms and lawyers who had a very busy Diwali break considering the notification came on November 6, 2015, a Friday, and the tax was to take effect from November 15, 2015. It bothers me a little that the government did not bother about the fact that considering the heavy tilt towards computerization of accounting and complex accounting systems, more time would probably be needed to make systemic changes. The lack of time to transition needless to say leads to hurried migration which often creates grey areas for litigation to spawn in. For a government that claims that it is devising a national litigation strategy and trying to de-clog our courts, providing fodder to the revenue department to take more cases all the way to the Supreme Court seems like one branch of the government not acting in furtherance of another branch’s interests.

Coming back to the hurry, it is becoming a regular habit of the present government to rush to do things, often then having to retract or clarify and in some cases even look publicly foolish. The encryption norms in news a few months earlier is a good example. Then there was the Negotiable Instruments Act/Ordinance fiasco which caused immense trouble to litigants, some of whom eventually gave up their claims.

Lastly, the inflationary cost of increase in taxes is something that again indicates that branches of the government are not communicating. A government that came to power on the manifesto of rejuvenating the economy and helping industry by easing investment and taxation norms, is introducing levies that are frankly not needed. Definitely not additionally. Any tax on services increases the cost of provision of services, especially when you have no input credit or backward integration, which is the case here. So while the marginal increase of service tax from 14% to 14.5% does not seem much, it is still 50 paise less for every Rupees 100 you earn. Thus, from a supply side it makes the services more expensive which eventually leads to the service provider passing on the burden to the customers which is inflationary. On the demand side, increase in taxes reduces the spending power of individuals and deflates demand. Thus, what you have in the end is a situation where at the altar of a “newer” agenda (read Swachh Bharat), the “older” agenda (read economic rejuvenation) is sacrificed, if only marginally.

Of course, the question here is not one which can be answered purely in the realm of law and economics and is definitely larger than that of the need of the levy. It could very well be the government trying to distract from the Bihar debacle with a hark back to its initial days when the people of India were enchanted with Swachh Bharat which then faded out for Beti Padao, Beti Bachao, which then faded out for performance of Yoga for one day at an international scale!




  1. Amrutanshu Dash · November 22, 2015

    I had two clarifications:

    1. Coming to your first issue, “why not a cess of x% but an increase of existing tax by y%’. Do you mean that the cess should have been taken from the current service tax (or any tax for that matter) as a percentage of the service tax (like 1% of the service tax collected is meant for SB cess) in which case there is no increase in tax or are you hinting towards a method in which a cess is collected independently at some percentage of service tax?

    2. You have alluded to cess being an emergency measure levied in case of unforeseen eventualities. Is their any authority to support this proposition?


    • namanjoshi · November 22, 2015

      As far as (1) is concerned, if you see the education cess it is 3% of income tax (2% basic education cess + 1% higher education cess). Thus, a person who earns Rs. 10,00,000/- and is say covered by a 30% income tax rate pays Rs. 3,00,000/- as income tax and additionally pays 3% of Rs. 3,00,000/-, i.e. Rs. 9,000/- as total education cess. However, what the Government has done in the case of SB Cess is that instead of saying that 1% or 2% of your service tax liability will be additionally imposed as a cess, they have simply raised the rate of Service Tax from 14% to 14.5%. Typically, cess is understood as a tax on tax rather than an increased tax.

      Coming to (2), you could see Justice Hidayatullah’s opinion in Shinde Brothers (mentioned in the piece). My understanding of “special administrative expense” is something that wasn’t originally taken care of. Otherwise why not simply increase the rate of income tax to accommodate the 3% education cess?


Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s