The increased need for spending on health and the mounting fiscal deficit makes sustained health financing in India a huge challenge.
In this context, here is a look at the what and why of environmental tax as alternative sources of revenue.
How is household spending on health?
As per WHO data, in India in 2011, 17.33% of the population made more than 10% of their income as out-of-pocket payments on health.
The percentage was higher in rural areas compared to urban areas.
Globally, the average was 12.67%.
Similarly, 3.9% of the population in India made more than 25% of out-of-pocket payments on health, with 4.34% in the rural areas.
What is the policy suggestion?
The National Health Policy of 2017 suggested increasing the public spending on health from 1% to 2.5-3% of GDP.
The Economic Survey 2019-20 noted that doing so could decrease out-of-pocket expenditure from 65% to 30% of overall healthcare expenses.
The COVID-19 pandemic necessitated countries to rethink climate change and the need for preservation of the environment.
Considering these two, the need for alternate sources of health financing through ‘fiscal reforms for managing the environment’ is increasingly felt.
What are the available options?
Environment regulation may take several forms:
command and control
economic planning/urban planning
environmental tax (eco tax)/subsidies
cap and trade
India currently focuses majorly on the command-and-control approach in tackling pollution.
So, environmental tax reforms could now be considered as an option.
This generally involves three complementary activities:
eliminating existing subsidies and taxes that have a harmful impact on the environment
restructuring existing taxes in an environmentally supportive manner
initiating new environmental taxes / eco tax
How about the eco tax?
An eco tax involves evaluation of the damage to the environment based on scientific assessments.
This would include the adverse impacts on the health of people, climate change, etc.
Ideally, the eco tax rate should be equal to the marginal social cost arising from the negative externalities of a project.
This applies to externalities associated with the production, consumption or disposal of goods and services.
How should eco tax be in India’s case?
The success of an eco tax in India would depend on its architecture i.e. how well it is planned and designed.
In India, eco taxes can target three main areas:
differential taxation on vehicles in the transport sector purely oriented towards fuel efficiency and GPS-based congestion charges
in the energy sector, taxing fuels which feed into energy generation
waste generation and use of natural resources
There is also a need to integrate environmental taxes in the GST framework.
It is also essential that the eco tax regime remains credible, transparent and predictable.
What is the likely effect?
The implementation of an environmental tax in India will have three broad benefits: fiscal, environmental and poverty reduction.
It an mobilise revenues to finance basic public services.
It can also be used to reduce other distorting taxes such as fiscal dividend.
In developing countries like India, it can be used for the provision of environmental public goods and addressing environmental health issues.
It helps internalise the externalities, and the said revenue can finance research and the development of new technologies.
But, environmental regulations may also have significant costs on the private sector in the form of slow productivity growth and high cost of compliance, possibly resulting in price increase.
However, global experiences suggest negligible impact on the GDP, though such revenues have not necessarily been used for environmental considerations.
Considering all these, this is the right time for India to adopt environmental fiscal reforms.
