Is education cess serving its purpose?

The Government of India has been levying the education cess since 2004-05. The purpose is to facilitate improved education infrastructure and provide access to quality education by meeting additional financial resources required for interventions initiated for educational development across states. However, the purpose of levying the cess has come under the scanner for some time due to the diversion of such funds. The Union Budget (2024-25) of India has magnified such diversion of the proceeds of the reserve fund accrued due to the education cess. In the process, the norms of constitutional and financial federalism are violated.

While the main purpose of the education cess is to utilise the proceeds for scheme expenditure of the Ministry of Education, particularly the Centrally Sponsored Schemes (CSS) which benefit the states, the Union Budget has allocated the cess funds to its central institutions. The allocations to central institutions ideally should have been part of other central sector expenditure categories and to be met from normal budgetary support out of tax proceeds, and not from the fund consisting of education cess proceeds. Funds being used in such a way do not fall under scheme expenditure and so are not a part of transfers to states under CSS. Therefore, states do not stand to benefit from such allocations at all.

The education cess initially introduced in Union Budget 2004-05, was levied @ 2% and accordingly proceeds were collected to meet the financial resources required for implementing the Centrally Sponsored flagship Schemes (CSS) for education, such as Sarva Shiksha Abhiyan (SSA) and Mid-Day-Meal (MDM) programmes. Accordingly, Prarambhik Shiksha Kosh (PSK), was created in 2005 as a non-lapsable reserve fund into which the education cess proceeds are credited.

Subsequently, the Union Budget 2007-08 introduced the secondary and higher education cess (SHEC) @ 1% in addition to the education cess @ 2%. The objective of SHEC is to meet additional resources required for intervention programmes in secondary and higher education such as Rashtriya Madhyamik Shiksha Abhiyan (RMSA) and Rashtriya Uchchatar Shiksha Abhiyan or PM Uchchatar Shiksha Abhiyan (RUSA/PM-USHA). An attempt was made in 2010 to create a fund ‘Madhyamik and Uchchatar Shiksha Kosh’ (MUSK) along the lines of PSK as a non-lapsable reserve fund crediting the SHEC proceeds, but could not be realised then. Eventually, the MUSK was created in 2017.

Further, the Union Budget 2018-19 subsumed the education cess and secondary and higher education cess into a single Health and Education Cess (HEC)charged @ 4%,of which, it is understood that HEC equivalent to 3% would go to education and 1% to health. Of the 3 per cent for education from the HEC, it is understood that 2% proceeds would be credited to PSK and 1% to MUSK. However, a clear-cut demarcation has not been made in the distribution of HEC between education and health, again within education between primary, secondary and higher education. Even the CAG (Comptroller and Auditor General) in one of its recent reports has raised concerns about not demarcating the HEC funds.

The current Union Budget allocations are against the governing principles of the reserve funds of PSK and MUSK of the education cess. First, the letter and spirit of these funds are to meet the resources required for the Centre’s interventions in the form of the Central Sector Schemes implemented in states, hence these funds should be allocated for scheme expenditure at large and thus become part of transfers to states under CSS. Second, it was intended to meet the gap in requirements of implementing Centrally Sponsored Schemes across states, after exhausting the gross budgetary support of Union Budget made to the programmes such as Samagra Shiksha (SS) combining SSA and RMSA, MDM and RUSA. Third, the Union Budget allocations made to CSS would eventually benefit the states and in a way strengthen the financial federalism.

In the present budget, health and education cess proceeds credited to PSK are allocated for Samagra Shiksha (to the extent of Rs 31,000 cr) and Rs 12,000 cr for PM-Poshan, but the proceeds credited to MUSK are being diverted and used for other education sector expenditures of the Centre. There were instances of such diversion even earlier. The current budget, however, took this to new heights – the fund is allotted for Kendriya Vidyalayas (KVs), Navodaya Vidyalayas (NVs), University Grants Commission (UGC), and Central Universities (CUs), Indian Institutes of Technologies (IITs) and National Institutes of Technology (NITs) along with skill India. Largely, central bodies or institutions would benefit from the HEC proceeds credited to MUSK.

In all, the Union Budget 2024-25 has allocated ₹1.21 lakh crore to the Ministry of Education, of which nearly ₹73,500 crore allocated to School Education and about ₹47,500 crore to Higher Education. However, all of this is not allocated from normal budgetary provisions. A total of Rs 67,000 crore will be met from PSK (₹ 43,000 cr) and MUSK (₹ 24,000 cr). Of the total funds in MUSK, only around ₹6,500 crore are allocated to Samagra Shiksha, and around ₹500 crore for scholarships and the rest are allocated for meeting the expenditures of Central bodies or institutions like the KV/NV/UGC/CU/IIT/NIT under the Ministry of Education. Besides ₹2,600 crore of MUSK would be used in the skill development programme of the Ministry of Skill Development and Entrepreneurship. Of the ₹ 47,500 crore allocated to higher education, a paltry allocation of ₹ 1,800 crore has been made to the RUSA/PM-USHA meant for higher education in state-level institutions, but not a penny was allocated from MUSK to it! This is a gross diversion of resources of the education cess and its reserve funds of PSK and MUSK, much against the purpose of setting up the funds.

Although the process of levying cesses and surcharges, collection of proceeds and their utilisation by the Union government had begun in the 1970s and continued for the last five decades, the magnitude of such proceeds and their share in total tax revenues of the Union government increased unprecedentedly during the last two decades. Levying and enhancing cesses and surcharges itself gives rise to a vertical imbalance in financial federalism. Addressing the issue of vertical imbalance and compensating for it, the respective Finance Commissions recommended an increased share of central transfers to states in Union tax revenue. Contrary to this, revenue resources of the Union government are enhanced and increasingly mobilised through cesses and surcharges which are non-shareable with states. If the purpose of levying cess and surcharges is to mobilise the additional resources required in facilitating health care and enhancing the quality of education by implementing the programmes in states, then it should be spent accordingly for the purpose and that would benefit the states.

Public institutions of higher education in states are starved of financial resources and concomitantly quality is badly affected. UGC grants or RUSA/PM-USHA funds disbursed to them are meagre and make no impact. Less than 10% of UGC grants are allocated to state institutions and the rest to central universities and institutions. Even, allocations for UGC are cut down by ₹3,900 cr in the recent budget. While the UGC was allocated ₹ 6,400 crore in FY 2024 in the recent budget it was reduced to ₹2,500cr. Education cess proceeds of MUSK could have been put to better usage towards strengthening the higher education institutions under public management across the states.

(Revathi is Professor and

Director of Centre for Economic and Social Studies (CESS),

Hyderabad, and Venkatanarayana is Associate Professor)