PAC flags ₹9,222 crore of cess collections not moved to their reserve funds in 2024-25
A cess is collected for one purpose. So why did ₹9,222 crore of it never reach the funds meant for that purpose?
Published 9 September 2026. Written by Pratidin from the reports linked at the end; every fact checked by a separate review before publishing. How we work
Parliament's Public Accounts Committee (PAC) has expressed concern that ₹9,222 crore collected through cesses and levies in 2024-25 was not transferred to the reserve funds designated for them. The observation draws on paragraph 3.3.1 of the Comptroller and Auditor General's (CAG) Report No. 6 of 2026. The PAC chairperson noted that the committee had flagged the same problem in its 69th report, tabled in August 2023. The committee stressed that cess collections must be used only for the purposes for which they are levied, and not to finance the government's budget deficit.
A cess is a tax levied by Parliament for a specific purpose, over and above existing taxes. Like other receipts, its proceeds first go into the Consolidated Fund of India (Article 266(1)). The government is then expected to transfer them, with Parliament's approval, to a dedicated reserve fund, usually kept in the Public Account of India (Article 266(2)), from which the earmarked spending is made. When the money is not transferred, it stays available for general spending. The committee noted that such non-transfer can understate the revenue or fiscal deficit, because the transfer to the reserve fund would otherwise have been shown as expenditure.
The issue has a federal edge. Under Article 270, cesses levied for specific purposes are kept out of the divisible pool of central taxes that is shared with the States, so the Centre keeps all of it. States have long argued that a rising share of cesses and surcharges shrinks what they receive under the Finance Commission's formula. If cess money is then not used for its stated purpose either, the case for the cess itself weakens. The PAC had earlier recommended a scientific assessment of how much each cess should raise, periodic reviews of whether its objectives still hold, and regular crediting of the proceeds to the reserve funds.
Prelims facts
- The PAC flagged ₹9,222 crore of cess and levy collections in 2024-25 that were not transferred to their designated reserve funds, based on CAG Report No. 6 of 2026.
- Cess proceeds are first credited to the Consolidated Fund of India (Article 266(1)) and are meant to be moved to reserve funds, generally in the Public Account of India (Article 266(2)).
- Under Article 270, cesses levied for specific purposes are excluded from the divisible pool shared with the States.
- The PAC has up to 22 members, 15 from the Lok Sabha and up to 7 from the Rajya Sabha; since 1967 its chairperson has come from the Opposition, and no minister can be a member.
- The CAG is established by Article 148 and audits receipts and expenditure of the Union and the States; its reports on the Union's accounts are laid before Parliament.
Quick recall
- How much cess and levy money did the PAC say was not moved to reserve funds in 2024-25?
- ₹9,222 crore.
- Which CAG report was the basis of the PAC's cess finding?
- CAG Report No. 6 of 2026 (paragraph 3.3.1).
- Which Article creates the Consolidated Fund of India?
- Article 266(1).
- Which Article covers the Public Account of India?
- Article 266(2).
- Which Article keeps cesses out of the divisible pool shared with States?
- Article 270.
- What is the maximum strength of the PAC?
- 22 members: 15 from the Lok Sabha and up to 7 from the Rajya Sabha.
- Since when has the PAC chairperson come from the Opposition?
- Since 1967, by convention.
- Which Article establishes the office of the CAG?
- Article 148.
Prelims practice question
The proceeds of which one of the following are NOT shared with the States as part of the divisible pool of central taxes?
- Corporation tax
- Income tax other than on agricultural income
- Cesses levied for specific purposes under a law made by Parliament
- Customs duties
Show answer
Answer: (c) Cesses levied for specific purposes under a law made by Parliament. Article 270 provides for the sharing of Union taxes with the States but excludes surcharges under Article 271 and any cess levied for specific purposes under a law made by Parliament. Corporation tax, income tax and customs duties are part of the divisible pool.
Use this in UPSC Mains: previous-year questions
Recurring theme: Cesses, parliamentary financial control and Centre-State fiscal relations
- How to use this
The PAC finding shows cesses sit outside the shareable pool and are not always used for their purpose, supporting the States' argument that cesses tilt fiscal relations against them.
- Under Article 270, cesses levied for specific purposes are excluded from the divisible pool, so the Centre keeps all of it and States receive no share.
- States argue a rising share of cesses and surcharges shrinks what they receive under the Finance Commission's formula.
- The PAC, citing CAG Report No. 6 of 2026, flagged ₹9,222 crore of 2024-25 cess collections not moved to reserve funds, weakening the case for the cesses themselves.
- How to use this
Add a caveat: States argue that cesses kept outside the divisible pool have limited the real gain from Finance Commission devolution.
- Article 270 keeps cesses levied for specific purposes out of the divisible pool shared with the States.
- States have long argued that a rising share of cesses and surcharges reduces the effective devolution recommended by the Finance Commission.
- Suggest merging cesses that have outlived their purpose into the base tax, which would bring them into the divisible pool.
- How to use this
The Centre's power to levy cesses it need not share, and to retain unspent proceeds, illustrates the fiscal tilt towards a strong Centre.
- Cess proceeds go first to the Consolidated Fund of India (Article 266(1)) and are meant to move to reserve funds in the Public Account (Article 266(2)); ₹9,222 crore was not moved in 2024-25.
- Article 270 excludes such cesses from the divisible pool, so the Centre keeps all of it, a long-standing grievance of the States.
- The PAC says non-transfer can understate the fiscal deficit and had flagged the same problem in its 69th report (August 2023), showing weak follow-up.
Mains practice question
Cesses were meant to raise money for specific purposes, but their growing use raises concerns of fiscal transparency and fiscal federalism. Discuss in the light of the Public Accounts Committee's recent observations. (250 words)
Model answer
A cess is a tax levied for a specific purpose, and its proceeds are meant to be kept aside for that purpose. The Public Accounts Committee (PAC), drawing on CAG Report No. 6 of 2026, has flagged ₹9,222 crore of cess and levy collections in 2024-25 that were not transferred to their reserve funds.
Concerns of fiscal transparency
- Money retained in the Consolidated Fund can be spent on general purposes, defeating Parliament's intent when it approved the cess.
- Non-transfer can understate the revenue or fiscal deficit, since the transfer would otherwise count as expenditure.
- The PAC had flagged this in its 69th report (August 2023), showing weak follow-up.
Concerns of fiscal federalism
- Article 270 keeps cesses and surcharges out of the divisible pool, so States get no share.
- A rising share of cesses reduces the effective devolution recommended by the Finance Commission.
Why cesses persist
- They give the Centre flexible revenue for national priorities.
- Earmarking can protect spending on a priority from budget cuts, if the money actually reaches the fund.
Way forward
- Automatic, time-bound crediting of cess proceeds to reserve funds, with CAG reporting on utilisation.
- Sunset clauses and periodic review of each cess, as the PAC recommended.
- Merging cesses that have outlived their purpose into the base tax, which would enter the divisible pool.
Cesses can serve a purpose only if the money follows the purpose; otherwise they become a way around both Parliament and the States.
The basics
Why this matters
Every rupee the Union government spends must be approved by Parliament and checked afterwards by the Comptroller and Auditor General (CAG) and Parliament's Public Accounts Committee. The PAC's finding that ₹9,222 crore of cess money did not reach its reserve funds in 2024-25 is a test of whether that chain of accountability works.
What a cess is
A tax goes into a common pot and can be spent on anything Parliament approves. A cess is different (see Cess and surcharge): it is levied for a named purpose, and its proceeds are earmarked for that purpose. It is charged on top of an existing tax.
- Collected for general purposes
- Part of the divisible pool shared with States under Article 270
- Spent through the annual budget
- Levied for a specific purpose by a law of Parliament
- Excluded from the divisible pool, so the Centre keeps it all
- Meant to be credited to a dedicated reserve fund
Where the money is supposed to go
The route runs through the government's accounts, the Consolidated Fund and Public Account. The trouble arises at the transfer step.
- 1LevyParliament passes a law imposing the cess for a stated purpose
- 2CollectionProceeds are credited to the Consolidated Fund of India
- 3AppropriationParliament approves the transfer of the amount
- 4Reserve fundMoney moves to the designated fund, usually in the Public Account
- 5Use and auditSpending on the purpose, checked by the CAG and then the PAC
Why the gap matters
If the transfer is skipped, the money quietly funds general spending. The deficit can look smaller than it is, Parliament's purpose for the cess is not met, and States, which get no share of cesses, lose twice. The Comptroller and Auditor General records such gaps; the PAC's job is to press the government to fix them.
Go deeper
In one line: Parliament's Public Accounts Committee, relying on a CAG audit, has objected that ₹9,222 crore of cess and levy collections in 2024-25 was not moved to the reserve funds meant for it.
Why it matters for UPSC
This sits at the meeting point of GS3 (government budgeting, deficits) and GS2 (Parliament's financial committees, the CAG as a constitutional body, fiscal federalism). Prelims asks about Article 266, Article 270 and the composition of the PAC; Mains asks about cesses and Centre-State finances.
The core idea
A cess is an earmarked tax (see Cess and surcharge). Its proceeds land in the Consolidated Fund and should then move to a reserve fund in the Public Account, as explained in Consolidated Fund and Public Account. The Comptroller and Auditor General audits whether this happened, and the Public Accounts Committee examines the CAG's findings and holds the government to account.
Numbers and dates to remember
- ₹9,222 crore: cess and levy collections of 2024-25 not transferred to reserve funds.
- CAG Report No. 6 of 2026, paragraph 3.3.1: the source of the finding.
- 69th report of the PAC, tabled in August 2023: the earlier warning.
- 22 members: the PAC's maximum strength (15 Lok Sabha, 7 Rajya Sabha).
- Articles 148, 266 and 270: CAG; Consolidated Fund and Public Account; sharing of Union taxes.
Where to go next
- Cess and surcharge: what they are and why States object to them.
- Consolidated Fund and Public Account: the government's main accounts.
- Public Accounts Committee: Parliament's watchdog over spending.
- Comptroller and Auditor General: the constitutional auditor.
Go deeper: earmarking, deficits and the States
The case for cesses is flexibility. A cess lets the Centre raise money quickly for a national priority, and earmarking signals to taxpayers where the money goes. Because a cess (see Cess and surcharge) does not enter the divisible pool, the Centre does not have to hand over a share to the States, which makes it an attractive tool when the Centre is short of funds.
That is also the case against. States argue that when a growing share of the Centre's gross tax revenue comes from cesses and surcharges, the share they receive under the Finance Commission's formula shrinks in practice, even if the percentage devolved stays the same. The PAC's finding adds a second problem: if cess money is not moved to its reserve fund, the earmarking promise is not kept either, and the money funds the general budget.
There is also an accounting issue. Transfers from the Consolidated Fund to a reserve fund in the Public Account are booked as expenditure, as explained in Consolidated Fund and Public Account. Skipping the transfer keeps expenditure, and so the deficit, lower on paper. The Comptroller and Auditor General has repeatedly pointed to such gaps, and the Public Accounts Committee has recommended scientific assessment of cess amounts, periodic review of their objectives and regular crediting of proceeds.
Reform ideas include sunset clauses for every cess, automatic crediting to reserve funds, annual utilisation statements laid before Parliament, and folding old cesses into the base tax so that the States get their share.
Cess and surcharge
What they are and why States object to them.
In one line: A cess is a tax levied for a specific purpose on top of an existing tax, while a surcharge is an extra charge on a tax that is not tied to a purpose.
How they work
A cess is imposed by a law of Parliament, and its proceeds are meant to be spent only on the stated purpose, such as health and education. A surcharge under Article 271 is simply an addition to the tax, often on high incomes, and goes to the Centre for general use. Both are levied over and above the basic tax.
Why they matter for States
Article 270 shares Union taxes with the States on the Finance Commission's recommendation, but excludes surcharges and cesses levied for specific purposes. So the more the Centre raises through them, the less of its revenue is shared. This is a recurring complaint of States in debates on fiscal federalism.
Where to go next
Consolidated Fund and Public Account
The government's main accounts.
In one line: The Consolidated Fund of India holds the government's revenues and borrowings, while the Public Account holds money the government keeps in trust or sets aside, such as reserve funds.
Consolidated Fund
Article 266(1) says all revenues received by the Government of India, loans it raises and repayments of loans it has given form the Consolidated Fund. No money can be withdrawn from it without a law passed by Parliament, which is why the budget needs appropriation bills. Some items, such as the salaries of certain constitutional authorities, are charged on it and are not voted.
Public Account
Article 266(2) covers all other public money, such as provident funds, deposits and reserve funds. Cess proceeds are meant to move here into dedicated funds. Article 267 separately provides a Contingency Fund for urgent, unforeseen spending.
Where to go next
Public Accounts Committee
Parliament's watchdog over spending.
In one line: The Public Accounts Committee is Parliament's committee that examines the CAG's audit reports to check that money was spent as Parliament intended.
Composition
The PAC was first set up in 1921 after the Montagu-Chelmsford Reforms. It has not more than 22 members: 15 elected by the Lok Sabha and not more than 7 from the Rajya Sabha, for a one-year term. No minister can be a member. Since 1967, by convention, its chairperson comes from the Opposition and is appointed by the Speaker.
Functions
It examines the Appropriation Accounts, the Finance Accounts and the CAG's audit reports once they are laid in Parliament. It asks ministries to explain lapses and reports its findings, and the government reports back on action taken. The cess finding is an example: the PAC is following up on a CAG paragraph and on its own earlier recommendations.
Where to go next
Comptroller and Auditor General
The constitutional auditor.
In one line: The Comptroller and Auditor General of India (CAG) is the constitutional authority that audits the receipts and expenditure of the Union and the States.
Constitutional position
Articles 148 to 151 deal with the CAG. Article 148 creates the office. The CAG holds office for six years or until the age of 65, whichever is earlier, and can be removed only in the manner of a Supreme Court judge, on an address by both Houses on the ground of proved misbehaviour or incapacity. Duties and powers are set out in the CAG (Duties, Powers and Conditions of Service) Act, 1971.
Link to Parliament
The CAG's reports on the Union's accounts are laid before Parliament and then examined by the PAC, which is why the CAG is often called the PAC's friend, philosopher and guide. The cess finding came from CAG Report No. 6 of 2026.
Where to go next
Take the 9 September 2026 quiz: 30 Prelims-style questions with answers