A Green Tax would Help Augment Government Revenue : Daily Current Affairs

Date: 09/12/2022

Relevance: GS-3: Environment conservation, environmental pollution and degradation; Indian Economy and issues relating to planning, mobilization, resources, growth and development.

Key Phrases: Tax buoyancy, Green Tax/ Eco Tax, Revenue generation through Green Tax, Green washing, Industrial Pollution, Emissions by Industries, Taxing industrial emissions.

Context:

Efforts are being made by Governments, civil societies, corporates, businesses and even the common people towards net-zero emissions to nullify climate change and global warming.
India is in the driver's seat in these efforts and can explore a new dimension of taxing emissions which will augment the government revenues.

What is a Green Tax?

A Green Tax is a type of tax levied by the government for the purpose of environmental conservation.
It is believed charging taxes on emissions that cause pollution will lower environmental impairment in a cost-effective manner by encouraging behavioral changes in households and firms that need to decrease their pollution.
The revenue collected through such tax can be used to create green energy infrastructure, combat environmental pollution, afforestation and other such purposes which help in conserving the environment.
In India, many state governments such as Goa and Gujarat have provision for green tax or cess.
The Ministry of Road Transport and Highways (MoRTH) had introduced a similar tax called Green Tax / Eco Tax on older vehicles.

What is Tax Buoyancy?

Tax buoyancy is an Economic theory concept that explains the relationship between the changes in the government’s tax revenue growth and the changes in GDP.
It refers to the responsiveness of tax revenue growth to changes in GDP.
When a tax is buoyant, the government's revenue increases without increasing the tax rate.

Need for a Green tax

The government has been looking at different ways of augmenting its revenues because tax buoyancy cannot rely upon mere growth levels which can vary and abnormal situations (e.g. COVID-19) may affect them.
Usually faulty taxing policies of governments led to existing taxpayers being taxed even more in the name of environmental taxes or otherwise.
As the country goes digital and most business units are GST-registered, we have records of activities of each firm and we can consider taxing companies that pollute the environment.
This universe of companies can serve as the taxable base on which a green tax can be levied.
Even a rudimentary activity like farming causes pollution and this tax can be imposed at the mandi level, the official point of sale.

How to calculate pollution emitted by individual business activity and tax it?

There are different ways of arriving at the amount of pollution emitted by every business activity.
The current data shows that the industries/ sectors based on fossil fuels are most polluting such as manufacturing and construction, services, transport, chemicals and fertilizers etc.
- Services with no factories add to ecological atrophy with their buildings (fancy glass-front edifices of modern commercial complexes and cooling emissions) and servers that add to global warming.
The Centre can commission research agencies to independently evaluate the emissions of all industries and set standards for the same.
- Once these standards are in place these industries can be taxed on the basis of the pollution caused by their business activity.
Using broad industry averages emission as the norm
- Initially the companies can be slotted into industry groups based on how their production or sales are classified.
- A cut-off level of 50% of product sales or production can be used for classification.
- The product with the largest share in a company’s overall production or sales can determine its industry assignment.
Assessment of pollutant emissions can be reviewed periodically, as firms would be expected to do their utmost to induct new technologies and reduce their emissions over time.
This would ensure that the businesses pay for the damage caused to the environment.
Hence the Green Tax would be a levy based on the status of the company and defined by the industry to which it belongs.

There is a huge potential for revenue generation through green taxing in India

India’s top 4,000 odd companies had a combined turnover of roughly ₹100 trillion in 2021-22.
Intuitively, if a small green tax is imposed on the sales of these companies linked to pollution it may fetch large revenues.
- For e.g. an average green tax at 0.5% of the turnover will generate ₹50,000 crores annually for the government.
- This can be used to finance budget spending and it will complement the government’s efforts of issuing green bonds for projects that are environmentally compliant.
The green tax need not be uniformly applied, and its rate could vary from 0.1% to 2%, depending on the industry concerned.
- As the sales of these companies/ industries grow, they would automatically yield higher revenues to the government.

Is it justified to impose a green tax on all businesses?

Although many entities have long been involved with philanthropy of their own volition, there have been increased instances of misuse of funds by companies in the name of philanthropy.
Also, addressing social causes like health, education, open spaces, etc. is the job of the government and passing on such tasks to commercial entities makes little sense.
Businesses do not have the core competence to do social good and invariably end up passing on the funds to non-profit entities.
Even companies can be relieved of the mandatory corporate social responsibility (CSR) expenditure that firms currently bear.
- As most of the firms are channelizing funds and effectively CSR is not making much difference.
- Also, 2% is a significant number and against the spirit of business of making profits.
- It also increases the additional human resources requirements to the firms.

Greenwashing

The act of giving the impression that a company’s products are ecologically friendly is known as “greenwashing.”
This practice of making unfounded claims leads consumers to believe that a company’s products are more environmentally friendly or have a bigger positive influence on the environment than they actually do.

Challenges and Consequences

Assessing individual firm’s emissions with accuracy and proportional tax rate is a difficult process and presently there is no such robust technology in existence.
Companies may pass the tax cost onto the customers which may lead to inflation and a rise in prices, such steps are not desirable for vulnerable sections.
Lack of enforcement at the grassroots plagued by corruption may lead such initiatives to become just one more tax among the many.
It may hamper the small and local industries, MSMEs as their costs will increase which will reduce their competitiveness.
Some companies have been observed to indulge in ‘greenwashing’ just to meet CSR obligations and may find such loopholes for the Green taxing as well.

Conclusion

A Green Tax could be a right step on the lines of single taxing for emissions but it poses many challenges such as passing of costs onto the customers but it would not be very significant and can be absorbed.
Moreover, consumers of products and services that are environmentally unfriendly would also be made accountable to the world at large.
All in all the cost has to be borne by somebody but the government is sure to be a big beneficiary.

Source: Live Mint

Mains Question:

Q. Imposing a single uniform Green Tax on all the significant businesses can serve the dual purpose of curbing emissions and augmenting government revenues, critically analyze. (250 words)