The article by Kumar Sambhav Shrivastava titled “India diverts Rs. 56,700 crore from the fight against climate change to Goods and Service Tax regime”, published on Scroll.in on July 24, makes valid arguments but could have gone deeper into the issue.
When the Goods and Services Tax reform was being worked out, a major change proposed to the mode of taxation was to shift the accrual of taxes from the state where goods and services were being produced to the state where they were being consumed. This was done to redistribute indirect tax revenues to industrially backward states. However, manufacturing states, primarily those unencumbered with ties to the Centre, opposed this plan, fearing that their tax revenues would reduce.
To achieve a consensus and bring states on board, the Centre agreed to find a way to make good any decrease in state revenue resulting from the implementation of GST, for the first five years. For this, the Union government initially proposed an increased tax rate for certain commodities (such as luxury items and demerit goods like tobacco). However, the plan clashed with GST’s revenue sharing methodology, according to which the collections would be divided equally between the Centre and state of final consumption. With only half the extra tax collected with this method accruing to Central coffers, the proposed increases would have to be effectively doubled. Such drastic price hikes on luxury or demerit goods could have severely affected demand, leaving industries in peril. Moreover, additional rates of tax would have eroded the attempts to reduce the number of tax slabs, which was at the core of the GST reform.
The Centre thus decided to adopt The GST Compensatory Cess as a redressal mechanism.
A cess is a levy that is imposed to raise funds for a particular purpose and is ideally charged till that purpose is deemed achieved. Revenues collected as cess have several constraints in terms of usage. Unlike other taxes, which can be utlised at the government’s discretion, cess funds are non-lapsable (meaning unspent funds will be carried forward to the next year) and applicable solely for the purpose for which they were imposed. Also, cess, being the Centre’s prerogative, is centrally levied, administered, collected and used.
As states have no claim on the proceeds from a cess, the Centre could use the GST Compensatory Cess to create a compensatory corpus for states after GST was implemented, without being monetarily disadvantaged. This also allowed the Centre to raise rates of taxation on certain demerit and luxury products, without increasing the number of tax slabs.
The Clean Energy Cess, introduced in 2010, is a carbon tax on the production and importation of coal, lignite and peat, operating on the “polluter pays” principle. The cess was first levied at the rate of Rs 50 for every tonne of coal produced or imported. By 2016, this amount was scaled up to Rs 400. Proceeds from this tax would go to the National Clean Energy and Environment Fund, to be used for “funding research and innovative projects in clean energy technologies”.
The coal cess or Clean Energy Cess thus had the dual objective of penalising production and import of coal and its variants – to encourage a shift towards renewable sources of energy while garnering funds to support research and innovation in clean energy alternatives.
These revenues would accrue to the non-lapsable National Clean Energy and Environment Fund and then be invested appropriately.
When the Goods and Services Tax Compensation Cess was introduced, the Clean Energy Cess along with 12 others were abolished and effectively subsumed by it. This was followed by the transfer of funds accumulated by the abolished cess to the Consolidated Fund of India, from which most government expenditure is made.
A cess is a prerogative of the executive authority, unencumbered by legislative interference. Therefore, revoking a particular cess before it achieves its professed objectives would be well within the powers of the executive.
In short, beyond expressions of moral outrage, there is little scope to legally bring the government to task on the issue.
Moreover, in this case, Parliamentary approval was in fact acquired as the cesses were abolished by passing an Act.
Fortunately, this executive carte blanche doesn’t extend to fund utilisation. Proceeds of cess, though routed through the Consolidated Fund of India, must only be utilised for the proposed objectives. Any amount not used thus must be collected and preserved for a later day (again, to meet the same objectives). An infringement in these stipulations, apart from being illegal, threaten the very rationale of a cess, imperil any future levy and amount to a clear over-stepping of executive authority.
These actions are also indicative of a governmental apathy towards meeting environmental standards and jeopardise India’s commitment to the Paris Climate Accord on reducing global warming. Though the Paris agreement does not mandate creation of a corpus, money accruing to the National Clean Environment Fund had won the Indian government many plaudits for its commitment towards sustainable development, as did substantial hikes in the coal cess rates during the early years of the National Democratic Alliance’s tenure.
However, public outcry at the government’s recent actions, though welcome, have failed to attempt a deeper analysis of the situation.
Consumer bears the brunt
To begin with, the Clean Energy Cess, though laudable in its ideals to create a corpus to fund efforts to preserve and rejuvenate the environment, was exceedingly discriminatory both in conception and application.
The cess was levied on the production and import of coal in a manner comparable to the levy of excise on a specific unit (payable on the basis of quantitative units; length, weight, volume etc, in this case on metric tonnes of coal produced or imported). It therefore contained all the inherently regressive attributes of indirect taxation (tax levied on goods and services instead of direct taxes) The coal producer on whom cess is imposed transfers the burden to his customer through a hiked sale price.
Burdening the end consumer with the actual payment of cess violates the “polluter pays” principle. An end consumer’s contribution to environmental degradation is incidental to the act of consumption as it is accentuated, possibly even created, by a paucity of non-pollutive alternatives in the market. The true polluter, the public or private entity engaged in coal mining or thermal power production, for whom environmental degradation is a direct consequence of a consciously adopted energy policy or profit strategy, is thus hardly impacted by imposition of clean energy cess.
As electricity is a basic necessity, increases in price due to imposition of a cess would have negligible effects on the market share or profitability of individual firms. Even if one were to contemplate a shift by electricity boards towards renewable sources of power, purely motivated by price sensitivity, the oligarchic and conglomerate nature of the domestic power sector must be factored. Dominated by a few corporate entities whose diversified holdings encompass renewables and non-renewables, a loss of profits or market in non-renewables will be offset by an upswing in renewables. In effect, this policy may induce a price sensitivity led shift to renewable sources of power, but the cost externalisation process applied places both the environmental burden and the economic cost of effecting the change solely on the end consumer.
It is quite evident then that the clean energy cess did no justification to the “polluter pays” principle. It misidentified the polluter, taxing those most impacted by rising pollution levels and marginalised from energy policy decision making process, forcing them to bear the brunt, both environmentally and financially. This only heightens the regressive nature of the government’s diversion of dearly accumulated environmental funds to reserves less constrained in terms of usage.
The bigger loss
Also to be highlighted is the abysmal fund utilisation levels. As the article on Scroll.in points out, From 2010-’11 till 2016-’17, of the total cess collected (Rs 56,640 crore), transfers to the National Clean Energy and Environment Fund amount to a mere 37%. Out of this, less than 81% was actually used as project finance. So, only around 30% of collections were actually applied, and another meagre 7% were accumulated in a supposedly non-lapsable fund. The portion of that 30% funnelled into private purses through projects run on Public Private Partnerships is yet to be quantified, but even a glance at the bipartisan bonhomie governments share with the private sector would call for an extremely pessimistic prediction. Also to be viewed with suspicion is the NDA’s decision to double the Clean Energy Cess annually from 2014-’15 to 2016-’17, bringing it to Rs 400 a tonne where it stands today. Why hike funds for projects purposefully underfunded?
The unapologetic siphoning of the National Clean Energy and Environment Fund’s unused moneys to fund GST compensation to industrially privileged states to placate their disgruntlement over loss of revenues to lesser-developed states has created some public discourse on the rationale and ethics of the government’s action and some have even declared it to be immoral.
But if this effective loss of 7% of the funds is so impactful, what of the 63% (amount collected as cess that was not transferred to the Fund) for which no explanation exists? Or the rationale behind opting for a regressive indirect tax modelled cess imposed on all consumers instead of levying a direct tax centred variant, based on the incomes of coal mines and thermal power producers? Or the perennial foisting of duplicitous pro-capital policies masquerading as welfare? These are questions that must be raised as they concern a policy that was conceptually corrupt and which had facilitated a criminal siphoning of public funds.
The discourse over taxation policies must move beyond the reactionary, to question and analyse core aspects and concepts in an effort to effect a shift from accumulative taxation to one that could be potentially redistributive.
Anirudh Rajan is a researcher at the Public Finance Public Accountability Collective.