Greening of the GST

The environmental dimension of taxes must rank high in any rate rationalisation exercise

With revenues from the Goods and Services Tax, or GST, having stabilised after the ebbing of the pandemic, the time is now appropriate for rate rationalisation, which will deliver both revenue buoyancy and a simpler rate regime.

There has been considerable debate on what should be the ideal rate structure. The broad contours are clear. We should move towards a three-tier rate structure. The GST exemptions need to be broadly phased out, with only those exemptions being retained that were exempted by the states under the earlier value-added tax or VAT regime. This was the principle recommended by a committee on Dual Control, Threshold and Exemptions created by the earlier empowered committee of state finance ministers. Therefore, we need to have a limited list of items under exemptions, a merit rate perhaps at 8 per cent, a standard rate at 16 per cent (combining the 12 per cent and 18 per cent) and then a 28 per cent demerit rate, which can be moved to 30 per cent along with an increase in the gold and jewellery rate from 3 per cent to 5 per cent. This rate structure would provide broad revenue neutrality, besides ushering in a simple rate regime. Further, this rate rationalisation can be supplemented by the inclusion of aviation turbine fuel and natural gas into the GST net.

Illustration: Binay Sinha

Once this framework is laid down, the shifting of items from one rate slot to another can be done not on an ad hoc basis but based on the broad principles. This is the background in which a green agenda can be executed, which can be incorporated in the action points of the national environmental goals that the country can present at various international forums.

One of the distortions that has crept in the GST regime is to use the cess on coal for GST compensation to states. This must be immediately corrected. In the case of India, the transition from fossil fuels to renewables has to be not through gas (as India is deficient in this) but through cleaner coal. The cess on coal should rather be used in pursuing cleaner coal technologies. One such suggestion that has emerged from coal experts is that incremental coal output from Coal India and other agencies must be generated from underground coal mining, which means tapping into the deeper seams of coal. There are now enough cost-effective technologies available that can reach these deeper seams. Therefore, a greater proportion of coal in the transition must come from deep coal mining rather than open cast mining. A benefit of this is that coal from deeper layers emit less carbon dioxide per unit (compared to open cast mining) because of a higher energy conversion ratio.

The second important area is to incentivise plastic scrap usage in road constructions and also establish alternative usage for recycled plastic waste. Plastics production, unlike cement and steel, does not spew all the carbon dioxide into the air because a substantial part is retained in the plastics and decays slowly. It is therefore suggested that an expert committee be set up under the aegis of the Ministry of Road Transportation and Highways with participation from the Department for Promotion of Industry and Internal Trade to suggest tax incentives, especially GST incentives, for promoting plastic waste recycling. This could include GST concessions for recycling equipment, including Customs duty concessions, for efficient recycling technologies. In addition, the government can also consider setting up a technology mission to promote plastic recycling and finding alternative usage for recycled plastics as this alone will make the policy ban on plastics more effective.

Finally, the GST rate rationalisation exercise must seriously consider bringing down the GST rates on a range of components, consumables and spares used by the renewable sector falling under Chapter 84 and 85 of the GST tariffs. This reduction must be from the standard rate to the merit rate based on a green rating given by the line ministries to the finance ministry. Such components, consumables and spare parts would be identified on the basis of direct single and identifiable use with the renewable sector.

An expert committee can be set up with the Ministry of Environment, Forest and Climate Change and representations from the Ministry of New and Renewable Energy, which could jointly provide a green rating for all the equipment that help in the promotion of the renewable sector. The GST rate rationalisation exercise on these components and consumables must be done in conjunction with Customs duty changes, especially in the case of those critical components which are not expected to be made in India. Therefore, the GST rate rationalisation exercise must broadly move towards a three-tier structure, but shifting of items from one rate slot to another must be based on the recommendations of the two expert committees — one on promoting renewable and the other on plastic recycling. This would ensure that the merit rate also has an environmental dimension, and fixing the rate for individual items becomes more transparent and based on broad principles.

Ideally, the tax rates should be simple and must not influence the allocation of resources. However, with climate change posing an existential threat to the planet, we need to do everything possible to contribute to the global efforts to prevent the warming of the planet beyond 1.5 degrees centigrade from pre-Industrial Revolution levels. Greening the GST would be one small step in this collective endeavour.

The writer is a retired member of the Central Board  of Indirect Taxes & Customs. The views expressed are personal