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India diverts Rs 56,700 crore from the fight against climate change to Goods and Service Tax regime

This news has been causing quite a few ripples, with the most daring allegation being that of siphoning of funds, thus standing in contrast to India's commitment to Paris Accords. Well, the reality goes a bit deeper than merely reductionist. In what way, this happens is eloquently dissected by Anirudh Rajan



In an effort to redistribute indirect tax revenues to industrially backward states, a conceptual change in the mode of taxation proposed by the Goods and Services Tax reform was to shift accretion of taxes to the place of consumption from the place where goods are produced or services rendered. Manufacturing states, primarily those unencumbered with ties to the central government, fearing reduced tax revenues inevitably opposed such plans. To achieve consensus, a compensation was agreed upon which would make good any fall in revenues arising from GST levy, for a period of 5 years. To fund such, an increased tax rate for certain commodities (luxury and demerit goods) was initially proposed. This clashed with GST’s revenue sharing methodology which bifurcated all collections equally between centre and state of final consumption. With only half the extra tax collected accruing in central coffers, proposed increases would have to be effectively doubled. Such drastic price hikes for luxury or demerit goods might have severely affected demand leaving industries in peril. Moreover, additional rates of tax would have also eroded central attempts to reduce the number of tax slabs. GST’s incompatibility with the proposal lead to adoption of cess as a compensatory mechanism.
A cess is a levy imposed to collect funds for a particular purpose and ideally would be charged till that “purpose” is deemed achieved. Revenues collected are constrained in terms of usage. Unlike those garnered by other taxes which can be utilized at the discretion of the government, cess funds are non-lapsable and applicable solely for the purpose behind imposition. Also, cess being the central government’s prerogative, is centrally levied, administered, collected and utilized.
As states have no claim on cess proceeds, the centre could create a compensatory corpus without being monetarily disadvantaged. Beyond compensation, cess allowed the centre to raise rates of taxation, without increasing the number of tax slabs, of certain demerit and luxury products to levels prevailing under the preceding tax regime. Imposition of a new GST centric cess however necessiated co-option of all pre-existing cess on indirect levies, including the clean energy cess.
The Clean Energy Cess, a duty of excise levied u/s 83(3) of the Finance Act, 2010, is a carbon tax on the production and importation of coal, lignite and peat, operating on the “polluter pays” principle. Imposed on 1/7/2010 via the Union Budget, the levy aimed to simultaneously achieve a dual objective of penalizing production and importation of coal and its variants, hoping to effect a shift in energy consumption patterns to renewable sources while simultaneously garnering funds to support research and innovation in clean energy alternatives. These revenues would accrue to a non-lapsable fund (a fund that would not lapse on account of not being utilized), the National Clean Energy and Environment Fund (NCEF), where from it would be disbursed as appropriate investments.
The Clean Energy Cess along with 12 other was abolished by the Taxations Laws (Amendment) Act, 2017, with effect from 1/7/17. This was followed by a transfer of funds accumulated by the above abolished cess to the Consolidated Fund of India, as evidenced by central government’s diversion of funds lying unutilized in NCEF. As cess is a prerogative of executive authority, unencumbered by legislative interference, revocation of a particular cess prior to achievement of 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. In the given case, parliamentary approval was in fact acquired as abolition was facilitated by the passing of an act, introduced as a money bill.
Fortunately, this executive carte blanche doesn’t extend to fund utilization. Proceeds of cess, though routed through the Consolidated Fund of India, must only be utilized for the proposed objectives. Any amount not utilized must be collected and preserved for a latter-day reapplication in line with the very same objectives. Infringement of these stipulations, beyond the sheer illegality, threaten the very rationale of cess, imperiling 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, excluding schemes containing rampant opportunities for private profiteering (PPPs) and jeopardize Indian commitments to the Paris Climate Accord. Though the PCA does not mandate creation of a corpus, accretions to the NCEF won the government many plaudits for its commitment towards sustainable development as did substantial hikes in cess rates during the initial years of the NDA tenure.
Public outcry at the government's actions, though welcome, have failed to attempt a deeper analysis of the situation. Clean Energy Cess, though laudable in its ideals to create a corpus to fund environmentally preservative and rejuvenative efforts to negate the impact of burning fossil fuels, is exceedingly discriminatory both in conception and application.
As it was levied on the production and importation of coal in a manner comparable to the levy of excise on specific duty basis (payable on the basis of quantitative units; length, weight, volume etc., in this case on metric tonnes of coal produced or imported), it contains all the inherently regressive attributes of indirect taxation. The coal producer on whom cess is imposed transfers the burden to his customer via a hiked sale price. This transference is conducted at every stage of the product life cycle, until the cess reaches and is paid for by an end consumer of either electricity or any product or service whose creation involves the usage of electricity.
Burdening the end consumer with the actual payment of cess violates the “polluter pays” principle. An end consumer’s contribution to environmental degradation is ancillary to the act of consumption. This pollutive trait in consumption is accentuated, possibly even created, by a paucity of non-pollutive alternatives in the market, severely restricting the end consumer’s ability to consume in an environmentally sensitive manner. 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 determined energy policy or profit strategy, is hardly impacted by imposition of the clean energy cess. As electricity is a basic necessity both in terms of direct consumption and as a requirement in production, increases in price due to imposition of a cess across firms and market will have negligible effects on market share or profitability of individual firms. Even if one were to even 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, dominated by a few corporate entities whose diversified holdings encompass renewables and non-renewables, must be factored. 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 externalization process applied places both the environmental burden and the economic cost of effecting the change solely on an end consumer whose options are hamstrung by environmentally insensitive power sector planning by the state and an insatiable private sector urge to profiteer, unconcerned with the probability of an environmental fallout.

It is quite evident that in its current form the clean energy cess does no justification to the “polluter pays” principle. It misidentifies the polluter, taxing those most impacted by rising pollution levels and marginalized 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. Also to be highlighted is the abysmal fund utilization levels. From 2010-11 till 2016-17, of the total cess mis-collected (Rs. 56,640 crore), transfers to the NCEF amount to a mere 37%. Out of this, less than 81% was actually utilized as project finance. So, only around 30% of collections ever saw application with another meager 7% accumulated in a supposedly non-lapsable fund. The portion of that 30% funneled into priavte purses via Public Private Partnerships (PPPs) is yet to be quantified independently but even a glance at that the bipartisan bonhomie governments share with the private sector would call for an extremely pessimistic prediction. Also to be viewed with suspicion are the NDA sponsored hikes in Clean Energy Cess which doubled annually over period 2014-15 to 2016-17 from Rs. 50/MT to Rs. 400/MT. Why hike funds for projects purposefully underfunded?

The unapologetic siphoning of NCEF’s unutilized accumulations to fund GST compensation to industrially privileged states, to placate disgruntlement over loss of revenues to lessor developed states, has created some public discourse with the rationale and ethicality of the government’s action being questioned and some even declaring it to be immoral. If the loss of 7% is so impactful, what of 63% (collections not transferred to NCEF) for which no explanations exist? Or the rationale behind opting for a regressive indirect tax modeled cess imposed on all consumers instead of levying a direct tax centered variant 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 analyze core aspects and concepts in an effort to effect a shift from accumulative taxation to one that could be potentially redistribute.
 

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