Swachh Bharat cess may turn indirect taxes into a mess

When Prime Minister Narendra Modi was singing paeans from the Wembley stadium of London about how India is fitting in with the ease of doing business, back home, industrialists and businesspersons grappled with the implications of the newly imposed Swachh Bharat Cess (SBC). The Clean India cess, imposed from the middle of November, does not just belies the very core of ease of doing business but also signals the government’s complete disconnect from the realities of the day. The government’s new "cess raj" is not in sync with PM Modi’s idea of fiscal federalism as it bypasses the structure of taxes shareable between the Centre and state governments. What is more bizarre is, at a time when the economy needs lesser indirect taxation to trigger demand, the government has burdened consumers with policy-driven inflation via a steep hike in various indirect tax rates in the last two years.

Swachh Bharat Cess (SBC) is a classic case of unease of doing business. The government issued an ordinance on November 6 to levy 0.5 per cent SBC on service tax, which came into effect from November 15. SBC has pushed the effective rate of service tax to 14.5 per cent. Only the government can answer how a new tax becoming operational in the middle of the month can facilitate business. The fact is industry and traders could not even get enough time to reset their accounting system to factor the new tax in the bills. 

The Swachh Bharat cess is anything but swachh (clean). If indeed it had to be levied, it could have been introduced in the budget 2015, when service tax (including education cess) was revised upwards to 14 per cent from 12.36 per cent. Alternatively, the government could have waited for the budget 2016, which is just three months away from now. The issuance of series of notifications, releases, clarifications and FAQs on SBC, by Central Board of Excise and Customs has further implied that government did no due diligence on it. Budget 2015 had provisioned for two per cent Swachh Bharat levy, 0.5 per cent of which has been introduced. To implement it fully would require service tax to hit 16 per cent, escalating the compliance cost of tax for businessmen even more.  

SBC is a harbinger of an opaque indirect tax system, which was not expected from a government that used to consider layered web of taxes as the primary cause of price rise. Cess is a non-transparent way of taxation. These levies are often imposed to fund certain purpose; however there is no system to verify if the cess-pool money has gone to intended sector or scheme. There already exists cess levies on primary education, higher education, road development, petroleum, and exports for many years. In the last budget, government doubled clean energy cess on coal. The collection of these levies directly goes to consolidated fund of India and is utilised for financing govt’s general expenditure.  Swatch Bharat cess is the new member of the family. 

It appears the government rushed on levying cess and surcharges to offset the losses in revenues after accepting the recommendations of finance commission to increase the share of states in central taxes. The government will garner around Rs 1.5 lakh crore of revenues from all cesses and surcharges in current financial year. State governments will surely question the central government’s intentions on raising revenue outside the regular taxation system, which does not augur well for fiscal federalism. The tax could have been avoided altogether, at a time when Modi government is trying to build states’ consensus on GST. There is a high probability that cess raj would hinder the already fragile consensus on GST. 

While the prime minister is echoing ease of doing business all over the world, taxation has emerged as the weakest link of governance in last 18 months. PM Modi cannot be aloof to the fact that his tax administration is busy doing everything it can to make doing business difficult. First, the income tax, MAT decisions frustrated the hopes of investors, and now it is the turn of excise and service tax to make business further difficult. The disparity between high-flying promises and actions on ground is damaging the credibility of this government. Will the prime minister and finance minister take a moment to realise and repair that?