What is Cess on Income Tax?
Cess on Income Tax is an additional tax imposed by the government on top of regular income tax. Unlike regular income tax, which goes into the general government treasury, cess is collected for particular purposes. Even if funds collected are not fully utilized in a given year, they cannot be redirected for other uses and must be carried forward and used in the following year for the designated purpose.
Additionally, the Central Government is not required to share these cess funds, either fully or partially, with state governments. The funds collected from the cess are deposited into the Consolidated Fund of India (CFI), just like other taxes. However, these funds are allocated solely for a specific purpose.
Who is Eligible to Pay Cess on Income Tax?
- Every taxpayer is required to pay a cess at a rate of 4% on their income tax.
- Initially, the Central Government introduced a 2% education cess to fund basic education for the underprivileged.
- Through the Finance Act 2007, the government added a 1% secondary and higher education cess, however, it was discontinued in 2018.
- In Budget 2018, Finance Minister Arun Jaitley increased the cess by an additional 1% to support education and health initiatives for the Below Poverty Line (BPL) and rural families. A new ‘Health and Education Cess’ at 4% on income tax (including surcharge).
Types of Cess on Income Tax
Road and Infrastructure Cess:
- As per Sections 109 and 110 of the Finance Act, 2018, a special tax is levied by the government on high-speed diesel and petrol.
- This cess is mandatory for four-wheelers and heavy vehicles. Two-wheelers, three-wheelers, electric and hybrid vehicles are exempted.
- Currently, the cess is Rs 1 per litre for both high-speed diesel and petrol.
Health and Education Cess:
- From the financial year 2018-19, the government imposed a 4% cess for the improvement of health and education services.
- The Union Government enhances educational infrastructure and quality by implementing digitalization, hiring qualified teachers, and constructing school buildings, among other measures.
GST Compensation Cess:
- It is required for goods and services classified as demerits or luxury items.
- All Indian taxpayers have to pay unless they have chosen a GST composition scheme or are exporting these goods.
Construction Workers Welfare Cess:
- According to Sections 3(1) and 3(3) of the Building and Other Construction Worker’s Welfare (BOCWW) Cess Act 1996, employers must pay 1% of the construction cost to the Government as BOCWW cess.
Cess on Crude Oil:
- Natural gas and crude oil are subjected to ad valorem cess. The Central Government imposes a 20% cess on crude oil and natural gas for the development of the oil industry.
