A case for including eco-taxes and eco subsidies in the proposed goods and services tax. By S. GOPIKRISHNA WARRIER
THE National Democratic Alliance (NDA) government has been promoting goods and services tax (GST) as one making a paradigm shift in taxation that will reduce taxes and enhance the ease of doing business. Finance Minister Arun Jaitely has said that the government plans to move the Constitution 122nd Amendment, or GST, Bill, 2014, in the Lok Sabha during the second half of the Budget session in April end. However, according to media reports quoting State Finance Ministers, there is still no clarity on sharing resources between the Centre and the States and on whether the post-GST tax burden will be less or more than the current rates.
The book under review, Environmental and Fiscal Reforms in India, adds to an informed discussion on incorporating eco-taxes and eco subsidies in the GST system. D.K. Srivastava and K.S. Kavi Kumar, the lead authors of this volume, discuss ways in which eco-taxes could be disincentives for polluting industries and processes, and how eco subsidies could provide incentives for green processes. The idea is to bring environmental cost, which is currently an externality, into the accounting and taxation system.
The authors say: “Eco-taxes are not meant to be a revenue augmenting device. Instead, the idea is to change the structure of taxation without putting an additional burden on the taxpayers. They reduce the use of resources and pollution by making them more expensive. At the same time, they facilitate the reduction of distortionary taxes on labour and capital, making them cheaper.”
The main conceptual framework discussed in this volume emerges from the environmental economics research undertaken at the Madras School of Economics (MSE), Chennai. Srivastava is a former director of the MSE at which Kumar is currently a professor. The MSE study blends its research strength in environmental economics with its core competency in fiscal policy research, imparted from the time of the school’s inception by its founder Raja Chelliah.
Srivastava and Kumar suggest two important considerations to be taken into account when planning for India’s growth. “First, there is a need to recognise what the pollution load that is growing at potential rate implies. Secondly, while the proposed transition to GST might imply efficiency effects and, therefore, facilitate growth, left to itself it might also encourage pollution.”
They developed a methodology to examine the energy-growth-pollution linkages, which uses a macro-economic model to generate future demand and output profiles and an input-output model to examine inter-sectoral choices. The macroeconomic model estimates potential growth and potential tax revenues under suitable fiscal, trade and policy configurations up to 2030.
Common taxation regime
The proposed GST aims to bring about a common taxation regime with a view to eliminating the cascading of taxes, removing tax barriers in inter-State movement of goods and services, and ushering in a system under which taxation will be destination based. It visualises a system where goods and services will be taxed at the same rate. The rates will be common across States and the inter-State sales tax will be eliminated. This, in effect, is expected to create an integrated common market across the country, and replace the current fragmented system of taxation by the Centre and the States and the varying rates of taxation across States.
“However, the GST in this form may have perverse environmental consequences unless suitable provisions are built into the system,” Srivastava and Kumar argue. “For instance, if a polluting good is taxed at a lower rate under the GST regime than under the present tax structure, the resulting consumption of the good is expected to be higher. Further, in a destination-based system, the tax revenue will accrue to the consuming State rather than the producing State. This will not only increase emissions in the producing State, but will also leave it with lesser revenue to cope with the negative externalities of production.”
The “green” GST that the authors propose does not change the basic character of the proposed GST. There will be a single and uniform rate for both the Central GST (CGST) and the State GST (SGST), which together will be represented by the Integrated GST (IGST). In addition, the Centre and the States will have the power to levy non-rebatable excise/sales tax or cess over and above the CGST and SGST rates on petroleum products, demerit goods and polluting goods and services.
The authors state that “using eco-taxes in the GST framework works better for the sustained environment-friendly growth for India. It enables fixation of the core GST rate at relatively lower levels (initially at 14 per cent) thereby generating efficiency effects and better compliance. With low overall GST rates, resource allocation and compliance would be better, unleashing the productive forces of the economy and taking it towards achievable potential growth. The reduction in output of polluting goods and services is brought about by an increase in the non-rebatable component of the tax.”
What should be the amount of this non-rebatable eco-tax? That will depend on the good and an assessment of the point at which the price increase will reduce its consumption to the predetermined level.
Srivastava (along with Rita Pandey and C. Bhujanga Rao) suggests complementary eco subsidies to strengthen the environmental efficiency of the GST. “Subsidies can promote environment-promoting technologies and use of environment-friendly inputs. Subsidies can be targeted to specific sectors more easily than taxes, where adopting a sector-specific approach is not preferred. …In fact, tax revenue from environmental taxes can be used to promote environment-promoting subsidies.”
According to them, the four primary objectives that should guide the use of eco subsidies are encourage the use of environment-friendly inputs; encourage outputs that intensively use eco-friendly inputs; encourage technological innovation that will reduce the use of polluting inputs; and facilitate promotion of environment-friendly technologies.
The funds for eco subsidies can be obtained from the general tax revenue; a specifically created cess (such as the coal cess); private resources for environmental purposes leveraged by the government; and international sources such as the carbon fund and the Global Environment Facility. They have also suggested reduction and reallocation of environmentally perverse subsidies.
In the energy sector, eco subsidies can help the country phase out the current polluting coal-based thermal power technologies. While this would mean additional support for renewable solar, wind and mini-hydro energies, coal-based technologies can also be made cleaner with support. Combustion based on supercritical and ultra-supercritical steam can offer higher efficiency.
The use of cleaner ore-mining technologies and energy-optimising furnaces can make the iron and steel industry more environment friendly. There are options to make textile processing cleaner through the value chain. Considering that every habitation and every road in the country is filled with plastic waste, new ways of using plastic waste (in road construction, for instance) and new ways of reducing and recycling such waste deserve support.
Tax-based incentives and disincentives for environmental protection have been offered in many developed countries, especially Sweden, Germany and the United Kingdom, and in a few developing countries. Even in India, there has been talk of economic interventions though it has generally opted for the command-and-control method for environmental regulation. Industries are given permission to operate under various environmental laws. If pollution from their activities is above the prescribed limit, then the State Pollution Control Boards and the Union Ministry of Environment, Forests and Climate Change can stop the industrial facility from functioning.
Command-and-control systems are difficult to implement, need far greater number of personnel than what the governments employ currently, and can become sources of rent-seeking. In a system of economic incentives and disincentives the onus of managing environmental concerns and thereby increasing profitability falls on the industries.
The timing of the publication of Environmental and Fiscal Reforms in India is appropriate, considering that the government is planning to move the GST Bill in Parliament. Srivastava and Kumar have introduced well-researched arguments for incorporating eco-taxes and eco subsidies into the GST system.
An effective inclusion of eco-taxes in the GST will help the government gain greater access to financial resources to provide higher exemptions to individual middle-class taxpayers. The measures can also strengthen the element of environmental sustainability to the “make in India” agenda.
However, for that the government would have to be serious about conserving the environment even as it pushes the development agenda.
S. Gopikrishna Warrier is regional environment manager with Panos South Asia.