Education Cess

In taxation parlance, a cess is an extra levy that is collected over and above an individual’s basic tax liability. A cess is governed by the Income Tax laws of India, and many people consider it to be another form of tax.

However, before we start exploring the scope and benefits of education cess, we must hammer home the point that a cess is not like any other tax levied- be it direct or indirect or paid to the Central or State Governments.

What does Cess Denote?

A cess is collected for the welfare of a certain sector. It has end-use limitations. This is the primary difference between a tax and a cess. While taxes can be used wherever needed, a cess will be used only for the ends for which it was collected. Thus, a petroleum cess is useful for overhauling petroleum exploration and refineries. A ‘green’ cess is used only for ensuring environmental betterment, and so on.

In the same vein, an education cess is an extra amount levied for the welfare of the education system of our country. It cannot be used for any other purpose.

What is an Education Cess?

This section was tweaked slightly in 2018’s Union Budget. Following is a look at the pre-2018 scenario and then at the current scenario for better understanding.

On analysing tax payments over the last decade, individuals will notice that each year, a small amount is taxed over and above their basic tax output. This amount mostly comprises a number of types of cesses, one of which is an education cess. 

Before 2018, this cess had two components: A Primary Education Cess and an additional Secondary and Higher Education Cess. Both these components were used to make India’s burgeoning education sector robust and modern. 

Note that any cess, including education cess, is never deducted from an individual’s salary. It is instead deducted from his or her tax payable. Even corporations have to pay this cess each year at rates determined during the annual budgets. 

Therefore, education cess on income tax is an accurate description of this extra outflow. 

Also, before 2018, the total education cess was fixed at 3% of an individual’s tax payable. This had been the norm for many years.

In 2018, the Central Government increased this cess to 4% of taxes payable for both individuals and corporate. 

This increased cess was named health and education cess. As is obvious, this extra amount collected would be used for the betterment of both the health and the educational infrastructure of far-flung villages and smaller towns where proper schools were missing.

A health and education cess serve a lot more fields than its predecessor. Surveys have found that the top reason for school drop-outs was a lack of high-quality mid-day meals. It is expected that this 4% cess, introduced throughout India, will have enough firepower to address drop-outs and contribute to improving India’s literacy rate from the present 77.7%.

Education Cess Interest Rates

The government’s intention in instituting an education cess was to provide and finance quality basic education for pupils who could not otherwise pay it. Although the initial goal was to assist kids in finishing primary school, the government quickly understood the need of giving access to quality secondary and higher education as well. To that end, the Finance Act of 2007 imposed a 1% surcharge on secondary and higher education.

Thus, the education cess rate became 2% of the tax payable, while the secondary and higher education cess totaled 1% of the tax payable. The education cess rate of 3% of the tax payable was levied on all types of education tax combined.

In Budget 2018, the administration proposed replacing the 3% education cess with a 4% health and education cess beginning in fiscal year 2021 – 22.

Hence, currently, the government of India levies a 4% health and education cess on the direct income tax liability of individuals

Example of Education Cess Calculation

Following is an example to demonstrate how this cess was calculated. Note that this example showcases the previous 3% regime and not the present one.

Consider the annual income of Mr Sharma, a private-firm employee. In the chart below, we can see his income and investments, followed by taxes.

There is, at the moment, some confusion on whether the states will have a part of the amount collected as cess. Given India’s federal structure, such a demand has long been made.

While there is no clear solution to this, the Central Government assures that a breakthrough will soon be made via discussion.

Education Cess Meaning: India’s Primary & Secondary Education Improved

Here are some proposals which will take shape gradually as the extra funds enter the system. Note that a cess cannot continue forever; it is withdrawn after its need is exhausted.

1. Increasing the access to education of tribal and BPL children in the remotest parts of this vast country. The Government is on record stating that any village or block with a majority of tribal residents will soon have an ‘Ekalavya Model Residential School’.
   
   
2. This increased education cess will go towards improving the internet connectivity of schools and students in remote areas for online classes and continued education. This proposal has gained significant traction in 2020 as the pandemic shuttered all educational institutes, with the academic year gone haywire.
   
   
3. Using this extra sum, the salaries of teachers, para-teachers and other staff at schools nationwide will probably see a hike.
   
   
4. To make 10+2 education more accessible, the Centre had introduced the ‘Rashtriya Madhyamik Shiksha Abhiyan’. The extra cess collected will go a long way in its implementation.
   
   
5. Finally, more states will have world-class institutes like the IITs and IIMs. There are already proposals of setting up several other branches of AIIMS in several large cities.

According to the latest data available, this 1% hike in this cess- collected now as the health and education cess– will add Rs. 11,000 crores to the Government’s treasury. This extra sum can be used to reinvigorate the country’s educational infrastructure.

How it is Used

As the name implies, this is a tax that is collected to allow the government to conduct education programs and schemes that can help improve the country’s educational quality and access. The money received by the government will be used for the following purposes:

• The cess is used to pay for students’ mid-day meals.
• It is also used to establish government-sponsored schools and institutions.
• This money is also used to pay the salaries of employees in government schools and colleges.
• The government can also use this money to establish education loans at lower interest rates for students to assist them to pay for higher education.
• It can also be used to fund special programs such as the Rashtriya Madhyamik Shiksha Abhiyan, which attempts to make secondary education more affordable.
• The funds could also be utilised to help renowned institutes such as IIT and IIM open more branches in states that do not currently have access to these institutions.
• If the government intends to increase the number of educational facilities for children, the money raised through the education cess can be utilised to pay for the programs.