Two additional levies the Centre imposes over and above the basic tax: a cess is a tax earmarked for a specific purpose, while a surcharge is a tax on a tax with no earmarking, raising general revenue.
- A cess is levied for a defined objective (for example a health and education cess) and its proceeds are meant to be used only for that purpose.
- A surcharge is an additional charge on the tax payable, usually on higher incomes, and goes into the general pool.
- Crucially, neither a cess nor a surcharge is shared with the states through the Finance Commission's divisible pool; they stay with the Centre.
- Because they bypass the divisible pool, a heavy reliance on cesses and surcharges reduces the share that flows to states, a recurring centre-state finance issue.
- They are part of central tax revenue and link to the concept finance commission and the budget.
The cess-versus-surcharge distinction (earmarked versus general) and the key fact that both stay outside the states' divisible pool are commonly tested fiscal-federalism facts.
A cess is earmarked for a specific purpose; a surcharge is not; both are retained by the Centre and not shared with states via the Finance Commission's divisible pool.
Cess is earmarked, surcharge is general; both stay with the Centre, outside the states' divisible pool.