What is Cess on Income Tax & the Types?

Per the Annual Report (2022-23) the Ministry of Finance issued, cess collections accounted for one-fifth of the gross tax receipts in FY21. Despite being a major source of revenue for the government and a consistent liability for taxpayers, most of us often collate cess with taxes. However, there are several differences between a tax and a cess. The basic difference is that a cess is an extra tax charged on your base tax liability for a specific purpose.

What is Cess on Income Tax?

A cess is a kind of add-on tax the Indian government levies for collecting purpose-specific funds. For instance, the education cess on income tax proceeds is used to fund the country's development of primary, secondary, and higher education facilities.

Since this add-on cess is dedicated to generating welfare cause-specific funds, the government can discontinue its collection after achieving the project goals. In other words, a particular cess on income tax may not be permanent. The funds collected from the cess are deposited into the Consolidated Fund of India, and their usage is restricted to project-specific funding.

Types of Cess in India

Here’s a list of some common types of cess taxes implemented in the country:

Health and Education Cess

Introduced first in 2018 by the then Finance Minister, Arun Jaitley, this cess on income tax collects funds to meet the health and education needs of the BPL (below poverty line) families. This cess tax is applicable on your income (regardless of the qualifying slab) at a 4% rate.

Road and Infrastructure Cess

Also known as the Motor Spirit cess tax, this charge applies to certain imported and excisable goods, as mentioned in the 6th Schedule of the constitution, like high-speed diesel and petrol. The proceeds from the cess go towards financing infrastructure projects in the country.

Crude Oil Cess

Oil and natural gas produced from domestic oil blocks in India are taxed at 20% of the total production volume. This cess is used for the development of the domestic oil industry.

Construction Workers Welfare Cess

This cess was introduced in 1996 by the Building and Other Construction Workers Welfare Cess Act. According to its mandate, employers of construction workers are liable to pay 1% of the total construction cost as a cess.

National Calamity Contingent Duty on Tobacco and Tobacco Products

This cess is levied on tobacco products, pan masala, and cigarettes. The 2023 Budget proposal sought to increase this cess on specified cigarettes by 16%.

GST Compensation Cess

The GST compensation cess is levied on certain specified goods like cigarettes, motor vehicles, etc. The cess also applies to goods mentioned under Section 3 of the Customs Tariff Act. Those exporting notified goods or covered under the GST composition scheme are exempt from this cess. While this cess was initially applicable for five years after GST implementation, the government has now extended the same until 31st March 2026.

GST implementation from 1st June 2017 abolished certain cess taxes like the Krishi Kalyan Cess, Tea and Jute Cess, and Clean Energy Cess.

How is a Cess Different from a Tax?

• A cess tax is charged over and above the applicable tax rate.
• Unlike certain taxes that need to be proportionally shared, the cess collected by the central government need not be shared with the state governments.
• The government can use taxes in any way it deems fit. However, cess fund usage is limited to their stated collection purpose.
• Introduction, modification, and abolition of cess taxes are easier than normal taxes that require amendments to existing tax laws.

Conclusion

While there may be many differences between cess and tax, they are both vehicles of socioeconomic development for the nation. That said, paying cess charges over your applicable income tax liabilities can make payments expensive.

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Frequently Asked Questions

1. What is the 4 % cess on income tax?

The central government levies an education and health cess of 4% on income tax. This rate is applicable regardless of your slab.

2. How is cess on income tax calculated?

Cess on income tax is calculated on your total taxable income post applicable deductions. Cess calculations will also include a surcharge if the total income exceeds Rs. 50 Lakhs. Surcharge rates vary depending on your annual income.

3. Who pays cess tax?

Cess on tax is collected from every eligible taxpayer over and above their regular tax liabilities.

4. What is the cess rate?

Cess rates vary depending on the type of cess being collected. For instance, the education and healthcare cess is 4%, while the crude oil cess is capped at 20%.