Taxation serves as a crucial tool wielded by governments worldwide, imposed on various bases such as income, activities, or fortunes. It operates within the framework of legislation and is not executed arbitrarily. In India, income tax exemplifies this system, vested in the authority of the Central Government to levy taxes on income generated within as well as outside the country, irrespective of the taxpayer's citizenship status.
Income tax typically follows a progressive structure, wherein higher earners face higher tax rates while lower-income individuals either incur minimal taxes or none at all. The revenue collected from taxation is often shared with State Governments to facilitate governance and public services.
A surcharge functions as an additional tax, distinct from regular taxation, with the stipulation that the proceeds need not be shared with State Governments. It primarily targets affluent individuals, applying as a percentage on their tax liabilities. This mechanism ensures that surcharges are levied solely on taxpayers reporting substantial incomes.
Both taxes and surcharges afford the Central Government discretion in their utilization, devoid of strict earmarking or allocation mandates. This flexibility allows for funding diverse governmental initiatives and expenditures according to prevailing priorities.
In contrast, a cess represents a mandatory imposition applicable to all taxpayers, irrespective of income levels. Calculated as a flat rate on the aggregate sum of tax and surcharge, cesses are earmarked for specific purposes denoted by their prefixed names, such as "Swachh Bharat" or "Higher Education." Unlike taxes and surcharges, the revenue generated from cesses is ring-fenced, exclusively designated for the intended purposes and cannot be diverted for general governmental expenditures.
In summary, taxation, surcharges, and cesses constitute integral components of fiscal policy, each serving distinct functions within the framework of revenue generation and resource allocation, guided by legislative provisions and governmental prerogatives.
