How does the non-transfer of cess collections affect the credibility and functioning of designated funds in India?

Cess is a form of tax that is collected for a specific purpose, and the proceeds are supposed to be transferred to designated funds for targeted spending (like education, health, or welfare). When cess collections are not transferred to these designated funds, it has several implications for public finance and governance in India.

• Undermines the Intended Purpose: Cess is collected with a promise that the money will be used for a specific cause. Non-transfer means these targeted sectors (like education or welfare) do not get the funds they were promised, hampering their development and effectiveness.
• Reduces Credibility of Government: When collected cess is not used for its stated purpose, it erodes public trust in the government’s financial management and transparency. People may become skeptical about future cess or tax collections.
• Violates Parliamentary Approval: Designated funds are created and approved by Parliament for specific uses. Not transferring cess to these funds bypasses legislative intent and weakens parliamentary control over public finances.
• Distorts Budgeting and Planning: Ministries and departments that depend on these funds for their schemes face uncertainty and resource shortages, affecting planning and implementation of crucial programs.
• Leads to Misallocation of Resources: The untransferred cess may be used for general expenditure or to reduce fiscal deficit, rather than for the intended targeted schemes, resulting in inefficient allocation of resources.
• Affects Social Equity: Many cesses are meant for welfare of vulnerable groups (like the education cess or the road cess). Non-transfer delays or denies benefits to these groups, increasing social inequities.
• Triggers Audit and Accountability Issues: Such practices attract criticism from oversight bodies like the CAG and weaken mechanisms of financial accountability in the government system.