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Context:

The Chairman of the 16th Finance Commission highlighted the States' complaints about the Union Government's increased dependency on cesses and surcharges as a "complicated issue."

What is a cess and how does it differ from a regular tax?

A cess is a tax on taxes charged by the Central Government for a specific purpose.

Unlike other taxes, such as income tax or excise duty, cess is intended to fund specific projects. For example, the Swachh Bharat Cess was implemented to promote cleanliness, while the Education Cess funds initiatives to promote primary education.

Cess is based on the total tax liability. For example, if the income tax rate is 30% and the Education Cess is 3%, the effective tax rate is 30.9%.

Cess funds must be used only for the purpose for which they were introduced. For example, revenue from fuel cess is directed to the Central Road Fund for infrastructure development.

What is a surcharge, and how does it differ from a cess?

A surcharge is an additional tax imposed on the tax liability of individuals or entities with a higher income bracket. Unlike cess funds, surcharge funds can be used for any purpose determined by the Central Government.

Individuals earning more than Rs50 lakh per year are subject to a tax surcharge. If taxable income exceeds Rs50 lakh but is less than ₹1 crore, a 10% surcharge is applied to the total tax liability.

Neither the cess nor the surcharge are shared with state governments. Both are deposited in the Consolidated Fund of India (CFI) and remain under the sole control of the Union government.

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Source:

The Hindu

PRACTICE QUESTION

Q.Which of the following is the main difference between cess and surcharge?

A) Surcharges are collected for a specific purpose, whereas cess can be used for any purpose.

B) Surcharges can only be levied on luxury goods, whereas cess applies to all taxpayers.

C) The cess is levied on the income tax paid, whereas the surcharge is levied on goods and services.

D) Cess are collected for a specific purpose, whereas Surcharges can be used for any purpose.

Answer: D

Explanation:

Cess funds specific projects, whereas surcharge supports general government spending. The cess applies to all taxpayers, whereas the surcharge only affects high-income taxpayers.