NDA (II) 2016 General Ability Test · Question 124 of 150

Correct — B, 1 and 2 only. The Krishi Kalyan Cess was introduced by the Union Budget of 2016 and levied from 1 June 2016 on the value of all taxable services, at half of one per cent — which is statement 2, and which was current when this paper was set in September 2016. Statement 1 is correct because the cess is computed on exactly the base that service tax is computed on, the value of the taxable service, so it simply added another half a per cent on top: service tax stood at 14 per cent, the Swachh Bharat Cess of 0.5 per cent had been added from 15 November 2015 to make 14.5 per cent, and the Krishi Kalyan Cess took the effective rate to 15 per cent from 1 June 2016. Statement 3 fails because no levy by the name Krishi Kalyan Surcharge exists in Indian tax law; the abbreviation is a manufactured one, and in any case a cess and a surcharge are different things.

• (a)1, 2 and 3 — It accepts statement 3, which invents a levy. A candidate who does not know the difference between a cess and a surcharge may find the sentence plausible, but nothing called a Krishi Kalyan Surcharge was ever imposed.
• (c)2 and 3 only — It keeps the invented levy and drops the true statement about how the cess is computed. The whole administrative point of the Krishi Kalyan Cess was that it rode on the existing service tax machinery, using the same valuation, the same returns and the same collection route.
• (d)1 only — It rejects the rate, which was correct as printed for the exam year. Half of one per cent is the figure fixed by the Finance Act of 2016 and the reason the headline service tax rate moved from 14.5 to 15 per cent that June.

A cess and a surcharge are both levies imposed over and above a basic tax, but they differ in purpose and in law. A cess is raised for a stated purpose and its proceeds are meant to be spent on that purpose — the Krishi Kalyan Cess was announced for financing improvements in agriculture and the welfare of farmers. A surcharge is a tax on tax with no earmarking, and its proceeds go into the general pool. Both share one important feature under the Constitution: their proceeds are not part of the divisible pool shared with the states under Article 270, which is why the states have repeatedly objected to the Centre's use of them.

Anchor this item firmly to its year, because none of the tax architecture it describes survives. Service tax, the Swachh Bharat Cess and the Krishi Kalyan Cess were all subsumed into the Goods and Services Tax when it came into force on 1 July 2017, so the Krishi Kalyan Cess had a working life of about thirteen months and the word 'current' in statement 2 is current as of September 2016, not today. The transferable lesson is the one about reading a manufactured term. When an option introduces an unfamiliar abbreviation in brackets, treat the expansion as the claim to be checked; here the expansion, Krishi Kalyan Surcharge, is the giveaway, because the levy in question is a cess and the Budget never announced a surcharge of that name.

• The Krishi Kalyan Cess was levied at 0.5 per cent on the value of all taxable services with effect from 1 June 2016.
• It raised the effective service tax rate from 14.5 per cent to 15 per cent — 14 per cent service tax plus 0.5 per cent Swachh Bharat Cess plus 0.5 per cent Krishi Kalyan Cess.
• A cess is earmarked for a stated purpose while a surcharge is a tax on tax that is not earmarked; neither is shared with the states out of the divisible pool.
• Service tax and both cesses were replaced by the Goods and Services Tax from 1 July 2017.

• Accepting an unfamiliar abbreviation that an option supplies with its own expansion; check the expansion, not the abbreviation.
• Treating cess and surcharge as interchangeable words — they are distinct heads with different rules.
• Reading 'current' in a 2016 paper as meaning today; this cess ceased to exist on 1 July 2017.

Taxation items in the GAT stay close to the Budget of the exam year, so learn each year's new levies with their rate, their date and the purpose they were announced for.

• practice — not a real PYQ

  Which one of the following correctly distinguishes a cess from a surcharge?

  • (a)A cess is levied by the states and a surcharge by the Centre
  • (b)A cess is earmarked for a specific purpose while a surcharge is not
  • (c)A cess is a direct tax and a surcharge an indirect tax
  • (d)A cess is shared with the states and a surcharge is not

  Answer(b) A cess is earmarked for a specific purpose while a surcharge is not — and the proceeds of neither form part of the divisible pool shared with the states.

• practice — not a real PYQ

  Service tax, along with the Swachh Bharat Cess and the Krishi Kalyan Cess, ceased to be levied when

  • (a)the Goods and Services Tax came into force on 1 July 2017
  • (b)the 2016 Budget was presented
  • (c)the Fifteenth Finance Commission reported
  • (d)value added tax was introduced in the states

  Answer(a) the Goods and Services Tax came into force on 1 July 2017 — it subsumed service tax and the cesses riding on it.