When you pay income tax, you also pay a small extra amount called cess, and if your income is very high, a surcharge. These are extra levies on top of the basic tax. They matter for exams because they are not shared with the States, which has made them a big topic in Centre-State finance. This post explains what cess and surcharge are, how they differ, and why States worry about them. It ends with 15 previous year questions.
Key Points (Quick Revision)
- A cess is an extra tax collected for a specific purpose, such as health or education.
- A surcharge is an extra charge on a tax, usually on high incomes, and can be used for any purpose.
- Under Article 270, cesses and surcharges are kept out of the divisible pool shared with States.
- Article 271 allows Parliament to levy a surcharge for the purposes of the Union.
- The Health and Education Cess of 4% was introduced in the 2018 Budget.
1. How central taxes are shared
The Centre collects taxes like income tax, corporation tax and the central share of GST. Under Article 270, these taxes go into a divisible pool, which is shared between the Centre and the States as recommended by the Finance Commission.
The 80th Amendment (2000) made almost all central taxes part of this pool. But it kept two things out:
- Cesses levied for specific purposes.
- Surcharges on taxes.
So the money from cess and surcharge stays fully with the Centre.
2. What is a cess?
A cess is a tax levied for a particular purpose. The money is meant to be spent only on that purpose. It is usually charged as a percentage of an existing tax or on certain goods.
| Cess | Purpose |
|---|---|
| Health and Education Cess (4% on income tax) | Health and education; replaced the earlier 3% education cesses in 2018 |
| Road and Infrastructure Cess (on petrol and diesel) | Roads and other infrastructure |
| Agriculture Infrastructure and Development Cess | Farm infrastructure; introduced in 2021 |
| GST Compensation Cess | To compensate States for revenue loss after GST in 2017 |
Rates and the list of cesses change with Budgets and GST Council decisions, so check the latest position.
3. What is a surcharge?
A surcharge is a tax on a tax. It is charged as a percentage of the tax amount, not of income.
- It is usually charged on high-income individuals and large companies, so it adds progressivity.
- For example, a person with taxable income above a set level pays income tax plus a surcharge on that tax, and then cess on the total.
- Unlike a cess, a surcharge is not tied to any specific purpose. The Centre can use it for any expense.
Article 271 allows Parliament to increase certain taxes by a surcharge for the purposes of the Union.
4. Cess vs surcharge
| Point | Cess | Surcharge |
|---|---|---|
| Purpose | A specific purpose, such as health or roads | General purposes of the Union |
| How charged | On a tax, or on goods and services | As a percentage of the tax amount |
| Who pays | Often all taxpayers of that tax | Usually only high earners |
| Shared with States? | No | No |
| Article | Excluded under Article 270 | Article 271, excluded under Article 270 |
5. Why States are concerned
The Finance Commission decides what share of the divisible pool goes to States. The 15th Finance Commission recommended 41%. But since cess and surcharge are outside the pool, a rising share of them means States get less in practice.
- When the Centre raises money through cess and surcharge instead of basic tax rates, the effective share of States falls.
- States have argued that this weakens cooperative federalism.
- Some have suggested a cap on cess and surcharge, or bringing part of them into the divisible pool.
6. Use of cess money
Since a cess is collected for a purpose, the money should be moved to a dedicated fund and spent on that purpose. The Comptroller and Auditor General (CAG) has pointed out in its audit reports that, in some cases, cess collections were not fully transferred to the related funds, or were used late.
This has led to calls for more transparency on how much each cess collects and how it is spent.
7. GST and cess
When GST began in 2017, most central and state cesses on goods and services were merged into it. A GST Compensation Cess was levied on luxury and sin goods to pay States for any revenue loss for five years, later extended to repay loans taken during the pandemic. The GST Council has since decided on its phase-out, so check the latest status.
8. Previous year questions
- Which Article deals with the sharing of central taxes with States? – Article 270
- Which Article allows a surcharge for the purposes of the Union? – Article 271
- Are cesses part of the divisible pool? – No
- Are surcharges shared with the States? – No
- Which Amendment made almost all central taxes shareable? – 80th Amendment (2000)
- What is a tax levied for a specific purpose called? – Cess
- What is a tax on a tax called? – Surcharge
- What is the rate of the Health and Education Cess on income tax? – 4%
- In which year was the Health and Education Cess introduced? – 2018
- Which cess was introduced in 2021 for farm infrastructure? – Agriculture Infrastructure and Development Cess
- Which cess was introduced with GST in 2017 to compensate States? – GST Compensation Cess
- What share of the divisible pool did the 15th Finance Commission recommend for States? – 41%
- Which body has pointed out gaps in the use of cess funds? – CAG
- Who usually pays the income tax surcharge? – High-income taxpayers
- Which body recommends the sharing of the divisible pool? – Finance Commission
9. How to revise this topic
Start with the Articles: 270 divisible pool, 271 surcharge for the Union, 80th Amendment of 2000.
Next, learn the difference: cess for a specific purpose, surcharge a tax on tax for general use; neither shared with States.
Then fix the examples: Health and Education Cess 4% (2018), Road and Infrastructure Cess, Agriculture Infrastructure and Development Cess (2021), GST Compensation Cess (2017).
Finally, remember the debate: 15th Finance Commission 41% share, falling effective share of States, CAG remarks on cess funds.
10. Frequently Asked Questions
What is the difference between cess and surcharge?
A cess is levied for a specific purpose, such as health or education, and should be spent on it. A surcharge is a tax on a tax, usually on high incomes, and can be used for any purpose of the Union.
Are cess and surcharge shared with States?
No. Under Article 270, cesses and surcharges are kept out of the divisible pool, so their revenue stays fully with the Centre.
What is the Health and Education Cess?
It is a 4% cess on income tax, introduced in the 2018 Budget, which replaced the earlier education cesses. The money is meant for health and education.
Why do States object to cess and surcharge?
Because they are not shared, a rising share of cess and surcharge in central taxes reduces the money that States actually get, even when the Finance Commission's share stays the same.
What is the GST Compensation Cess?
It was levied on luxury and sin goods from 2017 to compensate States for revenue loss after GST, and was later extended to repay loans taken during the pandemic.
For more Economy topics in simple language, see our Finance Commission, GST Explained and Centre-State Relations posts, or browse the Economy section. Preparing for a bank exam? Start with the RBI Grade B guide or join the 100 Hour GS Course.