By Sarthak Takyar
In India, instead of a carbon tax linked to emissions (apart from select pilot schemes), a broad carbon tax is levied on the consumption of polluting goods in a bid to increase their price and discourage consumption. The major taxes have been levied in the form of a cess on coal, lignite and peat, and excise duty and value added tax (VAT) on petrol and diesel. This article provides a brief background and examines whether there is a need to reconsider the imposition of these taxes in their current form.
Coal, lignite and peat production cess
The Indian government started levying a clean energy cess through the Finance Act, 2010. This cess was to be levied on the following goods over and above any other cess or duties already applicable: coal (briquettes, ovoids and similar solid fuels manufactured from coal), lignite (agglomerated or not, excluding jet) and peat (including peat litter, agglomerated or not). The cess was also to be levied on all forms of imported coal. The purpose of this cess was to finance and promote clean energy initiatives, fund research in the clean energy space, etc. The proceeds from the cess, which initially went to the National Clean Energy Fund, were to be used only by the central government and not shared with the states.
In 2010, two exemptions were added. One, other than raw coal, raw lignite and raw peat, all goods on which the cess was to be levied were exempted, the condition being that the clean energy cess would be paid at the raw coal, raw lignite or raw peat stage. Two, all goods produced or extracted by local tribals in Meghalaya were also exempted. In 2016, with another amendment, this exemption was also given to the tribals of Nagaland.
The rate for this cess was not fixed for the long term, and kept changing. It was initially fixed at Rs 100 per tonne (the effective rate being Rs 50 per tonne post-exemptions). In 2014, the effective rate was increased to Rs 100 per tonne. In 2015, the rate was increased to Rs 300 per tonne (the effective rate being Rs 200 per tonne post-exemptions). In the budget for the year 2016-17, the clean energy cess was renamed clean environment cess. In addition, the rate was increased to Rs 400 per tonne (the latter being the effective rate as well, because the exemptions were removed).
In 2017, with the introduction of the goods and services tax (GST), the cess was subsumed under the GST compensation cess. The GST compensation cess was levied on certain goods over and above the GST applicable to them, in a bid to compensate the manufacturing-heavy states, which were about to lose revenue due to the implementation of a consumption-based tax for a period of five years. Unlike the clean energy/clean environment cess, the compensation cess was once again levied at every point of supply.
For the upcoming Union Budget 2022, discussions are ongoing regarding the government waiving the Rs 400 per tonne cess on coal used by power plants that have met the emission control norms. This is expected to be an incentive for other developers to install flue gas desulphurisation (FGD) equipment to meet sulphur oxide norms, and other equipment to meet nitrogen oxide norms. Such incentives are also important for achieving the climate goals set by India at COP26: bringing down the country’s total projected carbon emission by 1 billion tonnes by 2030, reducing its carbon intensity by 45 per cent from 2005 levels by 2030, and achieving net zero carbon emissions by 2070. Such a condition-based waiver for thermal power projects has been contemplated for a while.
Penalties for non-compliance with emission norms
The emission norms for thermal power plants were notified in 2015 by the Ministry of Environment, Forest and Climate Change (MoEFCC). As per the Environment (Protection) Amendment Rules, 2021, the MoEFCC extended the timelines for complying with the emission norms for coal-based thermal power plants by up to three years, and divided the plants into three categories. The new rules have specified the penalty for non-compliance with the emission norms beyond the specified timeline for thermal power plants that are not to be retired. The penalties are Re 0.20 per unit, Re 0.15 per unit and Re 0.10 per unit for the three categories. These penalties are a relatively less harsh approach by the policymakers, given that the earlier plan was to close thermal power plants that remained non-compliant beyond the prior timeline of December 2022.
According to the Central Electricity Authority, as of October 2021, a total of 167,712 FGDs have been planned and 132,167 notice inviting tenders have been issued.
Reconsidering imposition of cess
If thermal power plants are already planning to set up emission control equipment, and penalties are already in place for non-compliance beyond the set timelines, then shouldn’t the cess be reconsidered?
With thermal power developers facing genuine challenges in meeting emission norms, waiving the cess without compliance conditions attached should be considered, especially when certain policy and regulatory issues on the government’s end are still present. In the past, a key concern for developers was the full recovery of additional fixed and operating costs of expensive equipment for plants with less than 25 years of remaining useful life. In 2020, the Central Electricity Regulatory Commission proposed a mechanism to recover such costs under the change in law provision, though this tariff compensation assumes 25 years as the period of recovery. Further, thermal power plant developers that sell power through the short-term market complain about the lack of clarity on the recovery of additional equipment costs. Moreover, issues related to difficulty in securing debt finance for plants that do not have long-term power purchase agreements, the substantial time taken by regulators to process petitions, and a possible downgrade in merit order despatch due to higher costs of production and import restrictions have also been raised.
If thermal power plants are already planning to set up emission control equipment, and penalties are already in place for non-compliance beyond the set timelines, then shouldn’t the cess be reconsidered?
Waiving cess, even without conditions, will also benefit several other stakeholders. For instance, the aluminium, steel and cement industries that use coal as a fuel will benefit due to the reduction of production costs, thus benefiting other infrastructure sectors through a positive ripple effect. Ironically, some of this equipment ends up being used in renewable energy projects, thereby putting pressure on renewable energy tariffs. In addition, a waiver would lower the tariff on coal-based thermal power projects, thereby not only improving the financial health of the discoms but also reducing citizens’ electricity bills. The bad financial health of discoms is considered a key reason for the lackadaisical growth in the rooftop solar segment and is considered an obstacle in the promotion of open access sale of renewables.
Waiving cess, even without conditions, will also benefit several other stakeholders. For instance, the aluminium, steel and cement industries that use coal as a fuel will benefit due to the reduction of production costs, thus benefiting other infrastructure sectors through a positive ripple effect
Reconsidering taxes on petrol and diesel
The awareness of a “carbon” tax on petrol and diesel is much greater, as it is directly and regularly paid by a large section of the population. It has in fact become a sensitive issue, given the soaring retail prices of petrol and diesel over the past few months, at times crossing even the Rs 100 per litre mark in some states. A strong public backlash led to an exchange of accusations between the central and state governments, as both charge taxes: the centre levies excise duty and the states impose sales tax/VAT (with rates varying across states). In fact, the centre also charges surcharge, an agriculture infrastructure and development cess, and a road and infrastructure cess on the sale of petrol and diesel, the proceeds of which are not shared with the states. Meanwhile, 41 per cent of the excise duty collected by the centre goes to the states as per the recommendations of the 15th Finance Commission.
The break-up of the retail price of petrol and diesel (Rs per litre) in Delhi, as of November 1, 2021, was as follows:
- For petrol: Rs 109.69, comprising base price (Rs 47.28), freight (Re 0.30), excise duty (Rs 32.90), dealer rate (Rs 3.90) and VAT (Rs 25.31).
- For diesel: Rs 98.42, comprising base price (Rs 49.36), freight (Re 0.28), excise duty (Rs 31.80), dealer rate (Rs 2.61) and VAT (Rs 14.37).
In sum, the total carbon taxes amounted to approximately 53 per cent and 47 per cent of the retail price for petrol and diesel respectively. Eventually, the central government, on November 3, 2021, cut the excise duty on petrol and diesel by Rs 5 and Rs 10 per litre respectively. After this announcement, several states followed suit and reduced VAT.
There is a strong case for significantly reducing carbon taxes on fuel – even doing away with them – as doing so would bring several benefits for the economy. The government’s argument to impose these taxes to cover Covid-19-induced and other welfare expenditure is not justified. The government itself has specified that a tax cut would boost consumption and keep inflation low. The growing cost of construction arising from the high fuel cost has ironically been a point of concern for renewable energy project developers as well. In fact, by boosting consumption, indirect taxes can be collected. Thus, a substantial cut in the carbon tax does not mean forgoing of tax revenue. If the extra money is not consumed but saved in banks, even that is beneficial as a high savings/investment rate of a country is a precursor to its high GDP growth rates.
There is a strong case for significantly reducing carbon taxes on fuel – even doing away with them – as doing so would bring several benefits for the economy
In addition, the idea that high fuel prices will promote the electric vehicle (EV) ecosystem is slowly being questioned. It is now being realised that availability of EV infrastructure is a more crucial factor than high fuel prices. Cases of electric buses being charged with diesel generators in select cities due to lack of charging infrastructure solidifies this perspective.
All in all, there may be a need to tax polluting industries to reduce exploitation. However, such taxes should not be numerous, frequently changing, deviating from their objective and unreasonably high, all of which would have a deleterious effect on the economy, industries and citizens. As Chanakya aptly wrote in the Arthashastra: “Tax should be collected from people like a honey bee draws nectar from a flower – without harming it.”
There may be a need to tax polluting industries to reduce exploitation. However, such taxes should not be numerous, frequently changing, deviating from their objective and unreasonably high, all of which would have a deleterious effect on the economy, industries and citizens
Update post Budget 2022: There is no mention of coal cess (under GST compensation cess) waiver with the conditions attached. Now, an additional differential excise duty of Rs 2 per litre will also be levied on unblended fuel from October 1, 2022.
