• The Union government may argue that a portion of the cesses and surcharges collected is used to fund centrally sponsored schemes and central sector schemes, as well as provide non-plan grants or capital transfers to States. However, these transfers are not untied, unlike the devolution of the State's share in central taxes. In centrally sponsored schemes, States are required to bear about 40% of the cost, and even in central sector schemes, the Union government's contribution is often minimal, leaving States to shoulder a significant financial burden.
• Moreover, when States contribute substantially to implementing a central project, the Union government often seeks to claim the credit by insisting on displaying the Prime Minister's photograph or other forms of labelling. Recent disputes over labelling in the Ayushman Bharat wellness centres exemplify this issue. Additionally, many grants given to States are contingent on fulfilling conditionalities, some of which include the requirement for labelling. Furthermore, most capital transfers provided to States are in the form of loans, which must be repaid to the Union government.
• None of the transfers to States outside the recommendations of the Finance Commission are either unconditional or suited to meet their specific needs. Instead, they reinforce a centralizing tendency in the fiscal realm, effectively pushing the Union-State relationship toward a patron-client dynamic. Any deviation from the guidelines or failure to meet imposed conditionalities can result in the denial of such resources.
• The share of States in central taxes is considered a benchmark in assessing fiscal federalism. It is concerning, then, that the Union government is increasingly providing fewer untied transfers to States while retaining more gross tax revenue as cesses and surcharges. Substituting untied transfers with central schemes does not mitigate the loss; rather, it introduces inflexibilities in Union-State relations and undermines the spirit of cooperative fiscal federalism.

4. CAG's Critical Scrutiny of Cesses and Surcharges

• The Comptroller and Auditor General (CAG) has subjected cesses and surcharges to critical examination. According to the established protocol, all cesses must be transferred to a reserve fund in the Public Account of India upon collection. However, CAG reports have revealed numerous instances of either non-transfer or short transfer of the collected amounts to the respective funds.
• For instance, a CAG report in 2023 highlighted that out of the ₹52,732 crore collected towards the Health and Education Cess in 2021-22, only ₹31,788 crore (or 60%) was transferred to the reserve fund of Prarambhik Shikha Kosh. Similarly, the Research and Development Cess, intended for the Fund for Technology Development and Application, saw a total collection of ₹8,077 crores between 1996-97 and 2017-18 but only ₹779 crore (or 9.6%) was transferred to the Fund, as noted in a CAG report in 2019.
• The Swachh Bharat Cess, earmarked for the Rashtriya Swachhata Kosh, experienced a shortfall of ₹4,891 crore between 2015–16 and 2017–18. Additionally, the Road Cess and Clean Energy Cess saw shortfalls of ₹72,726 crore and ₹44,505 crore, respectively, between 2010–11 and 2017–18.
• The non-transfers and short transfers of cesses undermine the rationale behind their collection. It also reinforces the perception that cesses and surcharges are merely a mechanism to divert funds away from the divisible pool to meet other financial needs of the Union government.