In taxation parlance, a cess is an extra levy that is collected over and above an individual’s basic tax liability. A cess is governed by the Income Tax laws of India, and many people consider it to be another form of tax.
However, before we start exploring the scope and benefits of education cess, we must hammer home the point that a cess is not like any other tax levied- be it direct or indirect or paid to the Central or State Governments.
A cess is collected for the welfare of a certain sector. It has end-use limitations. This is the primary difference between a tax and a cess. While taxes can be used wherever needed, a cess will be used only for the ends for which it was collected. Thus, a petroleum cess is useful for overhauling petroleum exploration and refineries. A ‘green’ cess is used only for ensuring environmental betterment, and so on.
In the same vein, an education cess is an extra amount levied for the welfare of the education system of our country. It cannot be used for any other purpose.
This section was tweaked slightly in 2018’s Union Budget. Following is a look at the pre-2018 scenario and then at the current scenario for better understanding.
On analysing tax payments over the last decade, individuals will notice that each year, a small amount is taxed over and above their basic tax output. This amount mostly comprises a number of types of cesses, one of which is an education cess.
Before 2018, this cess had two components: A Primary Education Cess and an additional Secondary and Higher Education Cess. Both these components were used to make India’s burgeoning education sector robust and modern.
Note that any cess, including education cess, is never deducted from an individual’s salary. It is instead deducted from his or her tax payable. Even corporations have to pay this cess each year at rates determined during the annual budgets.
Therefore, education cess on income tax is an accurate description of this extra outflow.
Also, before 2018, the total education cess was fixed at 3% of an individual’s tax payable. This had been the norm for many years.
In 2018, the Central Government increased this cess to 4% of taxes payable for both individuals and corporate.
This increased cess was named health and education cess. As is obvious, this extra amount collected would be used for the betterment of both the health and the educational infrastructure of far-flung villages and smaller towns where proper schools were missing.
A health and education cess serve a lot more fields than its predecessor. Surveys have found that the top reason for school drop-outs was a lack of high-quality mid-day meals. It is expected that this 4% cess, introduced throughout India, will have enough firepower to address drop-outs and contribute to improving India’s literacy rate from the present 77.7%.
The government’s intention in instituting an education cess was to provide and finance quality basic education for pupils who could not otherwise pay it. Although the initial goal was to assist kids in finishing primary school, the government quickly understood the need of giving access to quality secondary and higher education as well. To that end, the Finance Act of 2007 imposed a 1% surcharge on secondary and higher education.
Thus, the education cess rate became 2% of the tax payable, while the secondary and higher education cess totaled 1% of the tax payable. The education cess rate of 3% of the tax payable was levied on all types of education tax combined.
In Budget 2018, the administration proposed replacing the 3% education cess with a 4% health and education cess beginning in fiscal year 2021 – 22.
Hence, currently, the government of India levies a 4% health and education cess on the direct income tax liability of individuals
Following is an example to demonstrate how this cess was calculated. Note that this example showcases the previous 3% regime and not the present one.
Consider the annual income of Mr Sharma, a private-firm employee. In the chart below, we can see his income and investments, followed by taxes.
|Income Tax payable
|Rs. 8 Lakhs
|Life insurance – Rs. 30,000
|Around Rs. 65,000 since IT is being paid only on Rs. 6.8 lakhs [All investments are tax-exempt; hence, liability=Rs. (8-1.2) or Rs. 6.8]
|1. Primary education Cess -2% of IT or Rs. 1300
2. Secondary Cess-1% or Rs. 650
Total – Rs. 1950
|PPF account contribution-Rs. 40,000
|NOTE: Health and education cess will be 4% of Rs 65,000 or Rs. 2600.
|Sukanya Samriddhi Scheme – Rs. 20,000
|Personal pension scheme – Rs. 30,000
|Inclusive of bonuses etc
|Total investments – Rs. 1.20 lakh
There is, at the moment, some confusion on whether the states will have a part of the amount collected as cess. Given India’s federal structure, such a demand has long been made.
While there is no clear solution to this, the Central Government assures that a breakthrough will soon be made via discussion.
Here are some proposals which will take shape gradually as the extra funds enter the system. Note that a cess cannot continue forever; it is withdrawn after its need is exhausted.
According to the latest data available, this 1% hike in this cess- collected now as the health and education cess– will add Rs. 11,000 crores to the Government’s treasury. This extra sum can be used to reinvigorate the country’s educational infrastructure.
As the name implies, this is a tax that is collected to allow the government to conduct education programs and schemes that can help improve the country’s educational quality and access. The money received by the government will be used for the following purposes: