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Need for Environmental Tax Reforms - Eco Tax

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May 24, 2021

What is the issue?

  • 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:
  1. command and control
  2. economic planning/urban planning
  3. environmental tax (eco tax)/subsidies
  4. 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:
  1. eliminating existing subsidies and taxes that have a harmful impact on the environment
  2. restructuring existing taxes in an environmentally supportive manner
  3. 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:
  1. differential taxation on vehicles in the transport sector purely oriented towards fuel efficiency and GPS-based congestion charges
  2. in the energy sector, taxing fuels which feed into energy generation
  3. 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.


Source: The Hindu

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