Ordinarily, a cess means a tax which raises revenue, which is applied to a specific purpose.
Thus in Guruswamy and Co. vs. State of Mysore (AIR 1967 SC 1512), Hidayatullah, J. in his dissenting judgment observed:
“The word ‘cess’ is used in Ireland and is still in use in India although the word rate has replaced it in England. It means a tax and is generally used when the levy is for some special administrative expense which the name (health cess, education cess, road cess, etc.) indicates. When levied as an increment to an existing tax, the name matters not, for the validity of the cess must be judged of in the same way as the validity of the tax to which it is an increment.”
The aforesaid observations has been referred to by the Constitution Bench decision of Apex Court in India Cement Ltd. and Ors. vs. State of Tamil Nadu and Ors. (1990) 1 SCC 12) vide para 19.
Hence ordinarily a cess is also a tax, but is a special kind of a tax. Generally tax raises revenue which can be used generally for any purpose by the State. For instance, the Income Tax or Excise Tax or Sales Tax are taxes which generate revenue which can be utilized by the Union or State Governments for any purpose, e.g. for payment of salary to the members of the armed forces or civil servants, police, etc. or for development programmes, etc. However, cess is a tax which generates revenue which is utilized for a specific purpose. For instance, health cess raises revenue which is utilized for health purposes e.g. building hospitals, giving medicines to the poor etc. Similarly, education cess raises revenue which is used for building schools or other educational purposes.
However, in such matters nomenclature is not very important and we have to see the nature of the levy. Hence, what is called a cess may be in reality a fee depending on its nature.
It is well settled that the basic difference between a tax and a fee is that a tax is a compulsory exaction of money by the State or a public authority for public purposes, and is not a payment for some specific services rendered. On the other hand, a fee is generally defined to be a charge for a special service rendered by some governmental agency. In other words there has to be quid pro quo in a fee vide Kewal Krishan Puri vs. State of Punjab (AIR 1980 SC 1008).
The earlier view of the Supreme Court was that to sustain the validity of a fee some specific service must be rendered to the particular individual from whom the fee is sought to be realized. However, subsequently in Sreenivasa General Traders vs. State of Andhra Pradesh (AIR 1983 SC 1246), Supreme Court observed:
“The traditional view that there must be actual quid pro quo for a fee has undergone a sea-change in the subsequent decisions. The distinction between a tax and a fee lies preliminary in the fact that a tax is levied as part of a common burden, vide a fee is for payment of a specific benefit or privilege although the specific advantage is secondary to the primary motive of regulation in public interest. If the element of revenue for general purpose of the State predominates, the levy becomes a tax. In regard to fees there is, and must always be, correlation between the fee collected and the service intended to be rendered ……. There is no generic difference between a tax and a fee. Both are compulsory exaction of money by public authorities.”
Similarly in City Corporation of Calicut vs. Thachambalath Sadasivan (AIR 1985 SC 756), which had placed reliance on an earlier decision of the Supreme Court in Amar Nath Om Prakash vs. State of Punjab (AIR 1985 SC 218), it was held that:
“It is thus well settled in numerous recent decisions of Apex Court that the traditional concept in a fee of quid pro quo is undergoing a transformation and that though the fee must have relation to the services rendered, or the advantages conferred, such relation need not be direct, and a mere casual relation may be enough. It is not necessary to establish that those who pay the fee must receive direct benefit of the services rendered for which the fee is being paid. If one who is liable to pay receives general benefit from the authority levying the fee the element of service required for collecting fee is satisfied. It is not necessary that the person liable to pay must receive some special benefit or advantage for payment of the fee.”
Subsequently, also the same view has been reiterated that there has been a sea-change in the concept of a fee and now it is no longer regarded necessary that (i) some specific service must be rendered to the particular individual or individuals from whom the fee is being realized, and what has to be seen is whether there is a broad and general correlationship between the totality of the fee on the one hand, and the totality of the expenses of the services on the other, vide State of Himachal Pradesh vs. M/s. Shivalik Agro Poly Products, AIR 2004 SC 4393; (ii) there need not be an exact or mathematical correlation between the amount realized as a fee and the value of the services rendered. A broad correlation between the two is sufficient to sustain the levy.