Relevance: GS-3 (Economy – Taxation, Public Finance); Source: Indian Express

Parliament debated the proposed National Security Cess, which will be levied only on demerit goods such as tobacco and pan masala, and not on essential commodities. The revenue will be shared with States.

Key Concepts

What is a Cess?

A cess is a tax levied for a specific purpose (health, national security, environment).

• It is not part of the divisible pool, unless explicitly provided by law.
  
• Collected for earmarked expenditure.
  

National Security Cess (proposed)

• Levied only on non-essential, high-risk demerit goods.
  
• Purpose: create a dedicated, predictable revenue stream for health and national security.
  
• Based on capacity and production of specified goods, not on consumption.
  

What are Essential Goods?

Items crucial for daily life (food grains, medicines, basic utilities).
The cess explicitly excludes essential goods to avoid burdening common consumers.

Is Cess a “Tax on Tax”?

Indirectly yes—cess is applied over and above an existing tax (like excise duty or GST component).
But it must be used only for its stated purpose.

Implication: The cess changes tax incidence only on demerit goods, without affecting the GST structure for essential consumption.

Q. Consider the following statements regarding Cesses in India:

1. Revenue from all cesses is part of the divisible pool to be shared with States.
   
2. A cess must legally be used only for the specific purpose for which it is imposed.
   
3. National Security Cess can be imposed on essential goods to broaden the tax base.
   

Which of the statements is/are correct?
(a) 2 only
(b) 1 and 3 only
(c) 1 and 2 only
(d) 1, 2 and 3

Answer: (a)