March 29, 2012EconomyeducationIndiapublic financePublic Policytaxation

Why levy a Cess for education?

A question of priorities and an excuse for extravagance

This is an archived blog post from The Acorn.

Taxpayers and restaurant-goers in India will find a cess (2%) and a higher education cess (1%) added to their taxes and bills. The cesses are earmarked taxes collected to ostensibly finance education and higher education.

Like with most of the budget, few ask why this must be so.

The fundamental purpose of government revenue—the reason it collects all sorts of taxes on income, sales, excise—is to fund development expenditure. What could be more important for our country than spending on basic education, public health and basic infrastructure? Whatever the government spends on these heads must be fully financed from its primary revenues. In other words, these subjects should have the first claim on the government’s resources. Whatever might be our politics or ideology, no one can deny that these should be our priorities, and after we have adequately provided for these, we should spend on other things.

Why then does the government charge a cess for education and another cess on higher education? This seems to suggest that the fundamental priorities of the government are not concerned with improving the lot of the poor, the needy and the citizenry as a whole, but something else. The message is Ladies and gentlemen, since we’ve allowed other things to have the first claim on the government’s revenues, we don’t really have money for the most important priority, so we’re raising earmarked funds for education.” Beyond the technicalities of the economic effect of the cess, and without regard to ideological positions on how education ought to be delivered, the fundamental signal here is that the government’s priorities are wrong. The government is like an irresponsible husband wasting the family income on useless things and then seeking help to support his children’s school fees.

The cess is what is known as an earmarked tax. In terms of its economic effects, it has been found that earmarking can be beneficial, but the conditions for this are quite strong and are rarely met in practice. The earmarked tax (which may be a separate tax or a fixed proportion of a broad tax) needs to be kept separate from other revenue, be applied exclusively to the expenditure programme for which it is identified, and fully fund (but not over-fund) that programme rather than being mixed with general revenue.”

Money is fungible. If you give 100 rupees to a college student to buy his books, and he uses 100 rupees of his own pocket money to buy cigarettes, it’s tantamount to your money being used for cigarettes. This is the gimmick involved in the education & higher education cess. People who might object if the government had charged a Moon Mission cess”, a Nuclear Arsenal cess” or a Petrol Subsidy for the Middle Class cess” are less likely to do so if the cess were collected for a good cause”. That does not change the fact that every rupee collected in the name of an education cess is a rupee being spent on the most wasteful, most extravagant and most unnecessary items.

The finance minister needs to explain why a cess is necessary when tax revenues have been growing steadily over the last two decades. If the government has the money to subsidise unwarranted tablet computers for college students, why does it burden with cesses?

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