Definition
Education Cess and Health Cess
The health and education cess is an additional levy on income tax meant to fund spending on education and healthcare.
On top of income tax and any surcharge, taxpayers pay a health and education cess calculated as a percentage of the tax payable. As a cess, it is earmarked for the stated social purposes and is not shared with states through the Finance Commission devolution formula.
The cess raises the effective tax rate across income levels. Because cess proceeds stay entirely with the Centre, the growing reliance on cesses has been a point of contention in Centre-state fiscal relations.
Related terms
- Cess vs SurchargeA 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.
- 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.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.