Environmental Tax Reforms

Background:

  • As per WHO data, in 2011, 17.33% of the population in India made out-of-pocket payments on health that was more than 10% of their income. The percentage was higher in rural areas compared to urban areas.
  • Globally, 12.67% of the population spent more than 10% of their income (out of their pocket) on health.
  • In Southeast Asia, 16% spent more than 10% of their household income on health.
  • Similarly, 3.9% of the population in India made more than 25% of out-of-pocket payments on health, with 4.34% of it in the rural areas.
  • The Economic Survey of India 2019-20 has outlined that an increase in public spending from 1% to 2.5-3% of GDP, can decrease out-of-pocket expenditure from 65% to 30% of overall healthcare expenses.
  • The National Health Policy of 2017 also envisages increase in public spending from 1% to 2.5-3% of GDP.
  • This is where the importance of alternate sources of health financing in India needs to be stressed. Fiscal reforms for managing the environment are important, and India has great potential for revenue generation in this aspect.

Environmental tax reforms

  • Environmental tax reforms generally involve 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.
  • Taxes can be designed either as revenue neutral or revenue augmenting.
  • In case of revenue augmenting, the additional revenue can either be targeted towards the provision of environmental public goods or directed towards the overall revenue pool. In developing countries like India, the revenue can be used to a greater extent for the provision of environmental public goods and addressing environmental health issues.

Concept of Eco tax

  • The success of an eco-tax (environment tax) in India would depend on its architecture, that is, how well it is planned and designed. It should be credible, transparent and predictable.
  • Ideally, the eco tax rate ought to be equal to the marginal social cost arising from the negative externalities associated with the production, consumption or disposal of goods and services.
  • This would include the adverse impacts on the health of people, climate change, etc.
  • The eco tax rate may, thus, be fixed commensurate to the marginal social cost so evaluated.
  • There is also a need to integrate environmental taxes in the Goods and Service Tax framework.
  • 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 by taxing fuels which feed into energy generation.
  3. Three, waste generation and use of natural resources.

Significance:

  • The implementation of an environmental tax in India will have three broad benefits: fiscal, environmental and poverty reduction. Environmental tax reforms can mobilise revenues to finance basic public services when raising revenue through other sources proves to be difficult or burdensome.
  • It can also help to reduce other distorting taxes such as fiscal dividend. Environmental tax reforms help internalise the externalities, and the said revenue can finance research and the development of new technologies.

Impact

  • Environmental regulations may lead to slow productivity growth and high cost of compliance in private sector. This could result in the possible increase in the prices of goods and services.
  • However, the European experience shows that most of the taxes also generate substantial revenue and there is no evidence on green taxes with sustainable development goals leading to a ‘no growth’ economy.
  • Negligible impact on GDP: Most countries’ experiences suggest negligible impact on the GDP, though such revenues have not necessarily been used for environmental considerations.
  • The negligible impact on the GDP may be a temporary phenomenon.

Conclusion

  • This is the right time for India to adopt environmental fiscal reforms as they will reduce environmental pollution and also generate resources for financing the health sector.