BharatNotes What is Cess and Surcharge?
Cess and surcharge are additional levies imposed by the Union government over and above the basic rate of a tax. A cess is an earmarked tax — it is collected for a specific, stated purpose and its proceeds, though routed through the Consolidated Fund of India, are meant to be spent only on that objective (for example, the Health and Education Cess funds health and education programmes). A surcharge is effectively a "tax on tax": an additional charge on the tax already payable, with no obligation to specify a purpose. Both are wholly retained by the Centre and are not shared with the States.
Constitutional Basis
- Cess — levied under Article 270, which deals with taxes levied and distributed between the Union and the States. Sums needed for a specified purpose (cesses) are excluded from the divisible pool before devolution.
- Surcharge — governed by Article 271, under which "Parliament may at any time increase any of the duties or taxes referred to in [Articles 269 and 270] by a surcharge for purposes of the Union and the whole proceeds of any such surcharge shall form part of the Consolidated Fund of India." Notably, GST under Article 246A is excluded from the surcharge power of Article 271.
| Feature | Cess | Surcharge |
|---|---|---|
| Constitutional article | Article 270 | Article 271 |
| Purpose | Specific, earmarked | No specific purpose required |
| Computed on | Base tax payable | Tax payable (tax on tax) |
| Shared with States | No (outside divisible pool) | No (outside divisible pool) |
| Example | Health and Education Cess @ 4% | Income-tax surcharge on high incomes |
Current Status (as of FY 2025-26 / AY 2026-27)
- Health and Education Cess is levied at 4% on income tax plus surcharge (if any), across all slabs; it replaced the earlier 3% Secondary and Higher Education Cess in Budget 2018.
- Income-tax surcharge on individuals applies only where total income exceeds ₹50 lakh, on a graded scale — 10% (₹50 lakh–₹1 crore), 15% (₹1–2 crore), and higher slabs above that. The maximum surcharge is capped at 25% under the new tax regime, while the old regime can attract up to 37%.
Significance and Criticism
Cess and surcharge have become a major fiscal-federalism concern. Because they sit outside the divisible pool, a larger Union take through these levies shrinks the pool that States actually share. The divisible pool fell to about 75.7% of gross tax revenue in 2022-23 from nearly 90% in 2011-12, and cess and surcharge were estimated at around 23% of the Centre's gross tax receipts in 2024-25 (not shared with States). States such as Tamil Nadu have demanded raising their share, noting that actual devolution (~33%) falls short of the 15th Finance Commission's recommended 41%. The 14th Finance Commission flagged this and suggested either a constitutional amendment to bring these levies into the pool or a higher devolution share to compensate States.
UPSC Angle
Master three things: (1) the article mapping (cess — 270; surcharge — 271); (2) that both go to the Consolidated Fund and are not in the divisible pool; and (3) the equity critique in Centre-State relations. Do not confuse a cess (purpose-specific) with a surcharge (purpose-agnostic) — a recurring distractor in statement-based MCQs.
