Public Accounts Committee Flags Failure to Transfer Cess Collections to Reserve Funds

Economy & Polity · 9 September 2026 · Based on The Hindu (original report)

Worth reading — 1 past UPSC question on this theme (Prelims GS-1 2016).

2-minute summary

The Public Accounts Committee (PAC), headed by K.C. Venugopal, has flagged the Union Finance Ministry for failing to transfer ₹9,222 crore in cess and levy collections to designated reserve funds during the 2024-25 fiscal year. Based on CAG Report No. 6 of 2026, the shortfall includes significant gaps in the Pradhan Manti Swasthya Suraksha Nidhi (PMSSN) and the Oil Industry Development Fund (OIDF). Cesses are special purpose levies collected from citizens that do not form part of the divisible tax pool shared with States. The PAC criticized the non-transfer, warning that unallocated cess proceeds risk being absorbed to finance the fiscal deficit rather than serving their intended public welfare objectives. While the Finance Ministry defended its position by citing aggregate transfers including the Madhyamik and Uchchtar Shiksha Kosh (MUSK) and argued against maintaining fiscally imprudent idle balances amidst heavy government borrowing, the committee insisted that statutory and executive mandates for dedicated funds must be strictly honored.

Why it's in the news

The Public Accounts Committee flagged the Finance Ministry's failure to transfer ₹9,222 crore in cess collections to designated reserve funds, questioning whether proceeds are being used to finance the fiscal deficit.

Facts to remember

• The Public Accounts Committee flagged the Union Finance Ministry for failing to transfer ₹9,222 crore in cess and levy collections to designated reserve funds during the 2024-25 fiscal year.
• The shortfall highlighted in CAG Report No. 6 of 2026 includes significant gaps in the Pradhan Manti Swasthya Suraksha Nidhi (PMSSN) and the Oil Industry Development Fund (OIDF).
• Article 266 governs the Consolidated Fund of India into which all revenues received by the Government of India are paid, including cesses before transfer to reserve funds.
• The Pradhan Mantri Swasthya Suraksha Nidhi (PMSSN) is a single non-lapsable reserve fund for health to which proceeds of Health and Education Cess are channeled.

Background and context

Cesses and surcharges are levied by the Union government for specific, predetermined policy objectives (such as health, education, or infrastructure) and are credited to the Consolidated Fund of India. Unlike general taxes, cesses are outside the purview of the Finance Commission's divisible pool and are retained entirely by the Centre. Over the years, fiscal federalism debates have frequently centered around the rising share of cesses and surcharges in gross tax revenue—growing to over 10%—which restricts resource devolution to States. Furthermore, statutory reserve funds created to channel these collections have periodically faced audit scrutiny by the Comptroller and Auditor General (CAG) for short-transfers, delays, and the parking or subsuming of special funds within general government balances.

Constitutional provisions

• Article 270 — Excludes cesses and surcharges levied by Parliament for specific purposes from the divisible pool of taxes shared between the Union and the States.
• Article 266 — Governs the Consolidated Fund of India into which all revenues received by the Government of India are paid, including cesses before transfer to reserve funds.

Committees and reports

• Comptroller and Auditor General (CAG) Report No. 6 of 2026 — Highlighted short-transfers of cess and levy collections amounting to ₹9,222 crore into designated reserve funds during 2024-25.
• Public Accounts Committee (PAC) 69th Report — Recommended scientific assessment of cess collections, periodic reviews, and regular crediting of proceeds to designated reserve funds.

Government schemes

• Pradhan Mantri Swasthya Suraksha Nidhi (PMSSN) — A single non-lapsable reserve fund for health to which proceeds of Health and Education Cess are channeled; highlighted in the CAG audit for short transfers.

Previous UPSC questions on this theme

• Prelims GS-1 2016 — Which of the following is/are included in the capital budget of the Government of India? 1. Expenditure on acquisition of assets like roads, buildings, machinery, etc. 2. Loans received from foreign governments 3. Loans and advances granted to the States and Union Territories (a) 1 only (b) 2 and 3 only (c) 1 and 3 only (d) 1, 2 and 3

Mains practice: Examine the fiscal implications of the rising reliance on cesses and surcharges by the Union government. How does it impact fiscal federalism and transparency in public finance?

Introduction

Cesses and surcharges are special-purpose levies imposed by the Union government. In recent years, their share in gross tax revenue has grown significantly (accounting for over 10%), raising critical concerns regarding fiscal transparency and Centre-State fiscal relations.

Body

• Impact on Fiscal Federalism: Under Article 270 of the Constitution, cesses and surcharges are excluded from the divisible pool of taxes shared with States. The escalating reliance on cesses effectively reduces the size of the divisible pool, shrinking States' rightful share in central tax revenues and constraining their developmental expenditures.

• Compromised Public Accountability: As recently highlighted by the Public Accounts Committee (PAC) and CAG audits, substantial amounts collected through cesses (such as the health and oil cesses) are prone to short-transfers into designated reserve funds, risking their diversion toward financing the fiscal deficit rather than designated public goods.

• Lack of Transparency: Non-transfer of funds, idle reserve accounts, and complex offsetting arguments between different funds (like PMSSN and MUSK) obscure the actual utilization of taxpayer money collected from both rich and poor.

• Fiscally Imprudent Practices: While the executive argues against maintaining idle balances amidst heavy market borrowings, bypassing statutory reserve mechanisms weakens legislative oversight and public trust.

Conclusion

A structural reform in public finance is imperative. Cesses must be levied transparently for strictly limited durations, and statutory transfers to designated reserve funds must be enforced to uphold constitutional morality, transparency, and cooperative federalism.

Prelims practice questions

Q1. Consider the following statements regarding cesses and surcharges in India: 1. Cesses collected by the Union government form part of the divisible pool of taxes shared with the States under the recommendations of the Finance Commission. 2. Proceeds from cesses levied for specific purposes must be credited to designated reserve funds and utilized exclusively for those stated objectives. Which of the statements given above is/are correct?

1. 1 only
2. 2 only
3. Both 1 and 2
4. Neither 1 nor 2

Answer: B. Statement 1 is incorrect because cesses and surcharges are explicitly excluded from the divisible pool of taxes shared with States under Article 270 of the Constitution. Statement 2 is correct; cesses are raised for specific purposes and are expected to be credited to designated reserve funds for intended public welfare schemes.

Q2. With reference to the Public Accounts Committee (PAC) in the Indian Parliament, consider the following statements: 1. It examines the audit reports submitted by the Comptroller and Auditor General (CAG). 2. The Chairman of the PAC is invariably appointed from the ruling party or coalition. Which of the statements given above is/are correct?

1. 1 only
2. 2 only
3. Both 1 and 2
4. Neither 1 nor 2

Answer: A. Statement 1 is correct: examining CAG audit reports (Appropriation Accounts, Finance Accounts, etc.) is the core mandate of the PAC. Statement 2 is incorrect: by convention established since 1967, the Chairperson of the PAC is selected from the principal opposition party in the Lok Sabha, not the ruling party.

Q3. Which of the following bodies/authorities compiles and presents audit findings regarding short-transfers of cess collections into reserve funds, as seen in recent news?

1. Comptroller and Auditor General of India (CAG)
2. NITI Aayog
3. Reserve Bank of India (RBI)
4. Finance Commission of India

Answer: A. The audit examination and reporting of government finances, including short-transfers of cess and levy collections into reserve funds, are conducted and presented by the Comptroller and Auditor General of India (CAG).

Revision flashcards

• Are cesses and surcharges included in the divisible tax pool shared with States? No. Under Article 270 of the Constitution, cesses and surcharges are excluded from the divisible pool and are retained entirely by the Centre.
• What constitutional body examines CAG reports on financial irregularities and short-transfers of funds? The Public Accounts Committee (PAC) of Parliament.
• Who traditionally appoints the Chairperson of the Public Accounts Committee? The Speaker of the Lok Sabha, following a convention where the chairperson belongs to the principal opposition party.
• What was the core issue flagged by the PAC regarding cess collections in 2024-25? The failure of the Finance Ministry to transfer ₹9,222 crore in cess collections to designated reserve funds, risking their use for general fiscal deficit financing.
• What is the primary objective of designated reserve funds like the PMSSN? To act as non-lapsable funds financed through specific cesses to fund targeted public welfare sectors like health and education.