Adarsh Somani

Partner, Economic Laws Practice

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One Nation Many Cesses! – Now Agriculture Infrastructure And Development Cess

The multiplicity of taxes in India has historically created hindrance in smooth compliance procedure. In order to follow the objective of introducing simpler tax procedures and to achieve the objective of ONE NATION ONE TAX, AIDC should be discontinued as soon as its collection target is achieved, which if possible should be pre-defined.

Major controversies that inter-alia kept Government occupied over past months, was either Covid or farmer protests against new Farm Laws. While the government did face flak from various sections of the community for their policies, nonetheless, it remained steadfast in its endeavour & belief to introduce reforms it thought were fit and time was ripe. This intention was evident in the Union Budget 2021 proposals as well since significant budget allocations were made towards rural infrastructure, micro-irrigation, agriculture credit, etc.

These budget allocations, however, ought to be funded. And to do so, a traditional method has been used – the introduction of a ‘cess’ in name and style of Agriculture Infrastructure and Development Cess (‘AIDC’), effective February 2, 2021. This, in the lighter vein, is the new genre of cesses as against the education-related and clean energy type cesses in past!

Unlike previously introduced cesses, AIDC is touted as not placing any additional burden on consumers. The undertone of Hon’ble Finance Minister, in the Budget Speech and post Budget press conference, suggested that Government was making an implied promise to fund AIDC only from reduction in existing taxes. This proclamation that cess is self-compensating is indeed true. Government has counterbalanced the impact of AIDC by reducing taxes such as Basic Customs Duty, Basic Excise Duty and Special Additional Excise Duty. This balancing act was true for all products, but crude palm oil, where duty incidence has increased by 5%.

What remains to be seen is whether the self-compensating nature of the new cess is kept in long term.

New cess is introduced on import and manufacture of certain goods as the duty of customs and duty of excise, respectively. Selection of goods has been meticulous, as new cess will impact an only a small fraction of consumers. Illustratively, AIDC is imposed on import of apples, crude palm oil, wine, gold and silver and manufacture of petrol and diesel.

All other goods are exempted from the levy of cess. Additional relief is available if goods are imported under Advance Authorization Scheme, Export Oriented Unit Scheme, Free Trade Agreement, etc.

Further, the government should be lauded for obviating controversies, typically emerging on the introduction of new tax/cess, such as valuation, manner of computation, etc. All seem clear about AIDC and some early implementation news suggest zero hassles faced by the importers. However, certain interpretational issues such as eligibility to claim AIDC exemption on all FTA goods or only wholly exempted goods do persist and probably would soon be addressed by a department clarification.

Moving further, a few questions regarding rationale and legality of cess continue to intrigue industry. Why introduce a cess to reduce other taxes – makes only two versus one line item on paper and adds to the administrative burden. It is noted that the power to impose cess is enshrined in Article 270 of the Constitution of India. Cess typically enjoys dual benefits, which is (a) easy to introduce and more

importantly (b) no requirement to share with State Governments. However, a strict mandate is that cess should be earmarked and used for ‘specific purpose’ only.

Consequently, if cess collected in a particular year goes unspent, it cannot be allocated for other purposes. Judicial precedents have held that reason for imposing cess must not be vague and uncertain. Unfortunately, recent trend & usage has been contradictory but to Government’s avail, no major disputes have been taken to the courts.

In the context of AIDC, Finance Bill provides that imposition is for the purposes of financing the agriculture infrastructure and other development expenditure. Further, Hon’ble Finance Minister in the Budget Speech has provided that purpose of AIDC is to improve agricultural infrastructure in order to produce more, while also conserving and processing agricultural output efficiently.

However, the Government has chosen not to disclose the overall collection target and/ or estimated duration for which AIDC will remain in force. Sufficiency or otherwise, of reasons provided by Government is open for interpretation. In the past, RTI route has been used for insights in the manner of utilization of cess, which has resulted in seeking judicial intervention.

Another issue plagued with the imposition of cess is regarding Constitutional power to impose. In the context of AIDC, interestingly, State List covers agriculture, including agricultural education and research, protection against pests and prevention of plant diseases. Similarly, Concurrent List covers topics such as trade, commerce and production, supply and distribution of foodstuffs, including edible oilseeds and oils.

The above two entries, in some respects, overlap each other. While predominantly agriculture infrastructure should fall within Concurrent List, the possibility of adopting an alternate interpretation cannot be ruled out, especially depending on the manner in a fund is expended by Central Government. Again, this may result in a challenge to the power of imposition. The potential to challenge remains warm owing to the fact that the cess payment would be cost in hands of the taxpayer.

In so far as duty impact is counterbalanced and scope is kept limited, the industry should not be concerned with issues associated with legislative competence, etc. However, reduction of customs and excise duty to counterbalance AIDC does impact the share of pie that State Government receives from Central Government as part of the devolution of taxes. Let’s hope the State Government’s do not compensate for this loss by increasing State VAT on petrol and diesel, which is already astronomical.

The multiplicity of taxes in India has historically created hindrance in smooth compliance procedure. In order to follow the objective of introducing simpler tax procedures and to achieve the objective of ONE NATION ONE TAX, AIDC should be discontinued as soon as its collection target is achieved, which if possible should be pre-defined.

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house

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