A Cess for Health on Service Tax is a bad idea

Peter Drucker spoke of the bitch goddess growth[i]. Today, this growth
is the single minded focus of the Indian Government. To promote this
growth, policies are being pursued to encourage investment by the
private sector through subsidies and tax breaks. However, for the
private sector to succeed in making profits, it needs a trained,
healthy labour force. This the government has to somehow provide. And
for that it needs resources.

The current government has stated its policy clearly. The finance
minister has stated in Parliament that taxes must be kept low to
ensure the private sector invests its profits. By keeping taxes low,
there is more purchasing power in the hands of the rich [popularly
stated as ‘the people’], who proceed to spend it. In doing so, they
create demand for goods and services. These goods and services can
then be subjected to indirect taxes—in time the overarching Goods and
Services Tax—which will provide the government with the funds needed
to invest in health and education.

Today, the country barely spends 1% of GDP on health—among the lowest
in the world. In order to increase this amount, the finance minister
has introduced a ‘cess’ of half a percent on the existing service
tax—taking it from 14% to 14.5%.

The idea of a cess…a unique Indian contribution to public finance,
is for a short term need for funds for a specific purpose. This cess
is meant to go to the health sector—which, in India, is a state
subject, not a union one.

Health policy is a state subject, cleanliness concerns are local. If a
cess is to be used, it must be by municipal corporations, for specific
local projects.

This cess, as an add on to service tax, is at too high a level. There
will be no clarity as to how the union uses these cess funds. How will
it flow from the Consolidated Fund of India to municipal governments?
What will be the leakage on the way? How long will the process take?
These are questions to which we see no immediate answers.

This process will lead to unhealthy tensions across States. If the
union wants to increase funding for health, broadly defined, it must
do so through the income tax. Income tax rates in India are among the
lowest in the world. In addition, there are what is called ‘tax
expenditures’—exceptions from tax payment to both individuals and
companies. The effective rate of tax—the percentage of income actually
paid as tax—often comes to less than 25%. There are companies that in
the past have paid no income tax at all, in spite of huge profits.

It is this system of income tax that must be reformed. Gimmicks like a
cess on service tax, which is regressive like all indirect taxes—will
be like treating cancer with a bandaid.


[i] “Growth as a goal, to repeat, is delusion. William James, the
American philosopher, talked of the bitch goddess success. A
philosopher of business today might well talk of the bitch goddess
growth.” ―Peter Drucker, Part 3, Chapter 60, pg.780 – MANAGEMENT:
Tasks, Responsibilities, Practices (1973)


Vinod Vyasulu

Board Member and Research Mentor, CBPS


[Disclaimer: Views presented above are those of the author and do not necessarily reflect those of CBPS]

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