National Security Cess: Rajya Sabha Opposition Seeks Clarity on Allocation to States

Context:

• Parliament has passed the Health Security and National Security Cess Bill, 2025, proposing a cess on the production of pan masala and other notified goods.

• The Bill has triggered debate in the Rajya Sabha, with opposition MPs raising concerns about federalism, transparency, and whether states will receive a fair share of the revenue, especially since health is primarily a State subject.

Key Highlights:

Government Initiative / Tax Measure

• The Bill introduces a cess to generate dedicated revenue for:

  • Maintaining and modernising defence forces

  • Strengthening citizens’ health security

Parliamentary Process

• The Rajya Sabha discussed the Bill and returned it to the Lok Sabha after deliberation.

Opposition Concerns: Fiscal Federalism

• Opposition MPs questioned:

  • How cess proceeds will be allocated

  • Whether states will receive any share

• The key concern arises because cess revenues are generally not part of the divisible pool, limiting state access.

Health as a State Subject

• Members highlighted that health falls under the State List, and states bear primary responsibility for healthcare delivery.

• Therefore, they demanded clarity on how a centrally imposed cess would support state health systems.

Lack of Transparency in Utilisation

• Concerns were raised about the absence of clear earmarking on how the cess will be used for:

  • National security expenditure

  • Public health initiatives

Finance Minister’s Clarification

• The Union Finance Minister stated that:

  • The cess would support defence modernization and health strengthening

  • States would benefit through allocations under various schemes, addressing federal concerns

Significance / Concerns

• The debate reflects broader issues of:

  • Increasing reliance on cesses and surcharges

  • Reduced fiscal autonomy of states

  • Need for transparency in earmarked taxation

Relevant Prelims Points:

• Cess is a tax levied for a specific purpose, over and above existing taxes.

• Cess revenues are usually not shared with states through the Finance Commission’s divisible pool.

• Health is a State subject, making state governments central actors in healthcare spending.

• Fiscal federalism concerns arise when Centre collects more through non-shareable levies.

Benefits + Challenges + Impact

• Benefits: Dedicated funding for defence and public health priorities.

• Challenges: Weak clarity on revenue sharing, risk of undermining cooperative federalism.

• Impact: Could intensify Centre–State debates over fiscal resources and autonomy.

Relevant Mains Points:

Polity and Federalism Dimensions

• The Bill raises constitutional concerns regarding:

  • Financial autonomy of states

  • Centre’s growing use of cesses outside divisible pool

• Cooperative federalism requires predictable and equitable resource sharing.

Economic Governance Issues

• While earmarked taxation can support urgent national priorities, lack of transparency may weaken accountability.

• States may face greater fiscal stress if revenues are centralized while expenditure responsibilities remain decentralized.

Way Forward

• Ensure clear guidelines on utilisation and reporting of cess proceeds.

• Strengthen Centre–State consultation before imposing levies linked to state subjects.

• Consider mechanisms for greater sharing or compensation to states.

• Promote transparency to maintain trust in fiscal governance.

UPSC Relevance (GS-wise):

• GS 2 (Polity): Federalism, State subjects, Parliament’s financial powers

• GS 3 (Economy): Cess taxation, fiscal federalism, divisible pool issues

• Essay: Cooperative federalism and resource distribution challenges