Definition
Cess vs Surcharge
A cess is a tax levied for a specific earmarked purpose, while a surcharge is an additional tax on tax, usually on higher incomes, that is not earmarked.
Both a cess and a surcharge raise the effective tax a person or company pays, but they differ in design. A cess — such as the health and education cess — is meant to fund a particular objective and is technically tied to that purpose. A surcharge is simply an extra percentage levied on the tax payable, typically on higher income brackets or larger companies.
Crucially, neither is shared with the states through the Finance Commission devolution formula, unlike basic taxes. This is why states often complain when the Centre relies heavily on cesses and surcharges, since the proceeds stay entirely with the Centre.
Related terms
- Gross vs Net Tax RevenueGross tax revenue is the Centre's total tax collection, while net tax revenue is what remains after the states' share is devolved to them.
- Devolution to StatesDevolution is the constitutionally mandated transfer of a share of the Centre's divisible tax pool to the states, as recommended by the Finance Commission.
- Finance CommissionThe Finance Commission is a constitutional body set up periodically to recommend how tax revenues should be shared between the Centre and the states.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.