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Clean energy can pollute India's fiscal climate

Solar and wind energy must certainly replace fossil fuels, but India’s ambitious targets of clean energy need to be accompanied with a clear road map on how tax revenue will keep pace with the targeted reduction in the use of coal and oil

April 16, 2021 / 11:59 AM IST

India has a long way to go before solar energy and electric vehicles dominate its energy and mobility landscape. Thank god for that!

If India had made that transition to clean energy by 2020, the country would have been mired in a fiscal disaster in the pandemic year when revenue from almost all other sources collapsed; while tax revenue from hydrocarbons helped the economy weather the fiscal storm.

While it’s a noble intention to phase out hydrocarbons, which have given almost all major cities the ignominy of being listed among the most-polluted places in the world, policy-makers need to bear in mind that the Indian economy and tax collection are incurably addicted to liquid fuels.

A Clear Road map

The Indian economy has been able to minimise the fiscal damage from the pandemic by significantly increasing taxes on petrol and diesel. If these dominant drivers of locomotion and industrial processes were not in demand, India’s fiscal deficit would probably have doubled, and the government would have been forced to cut welfare schemes, road construction and several incentives given to industry and entrepreneurs.

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Solar and wind energy must certainly replace fossil fuels, but India’s ambitious targets of clean energy, and the impressive achievements so far, need to be accompanied with a clear roadmap on how tax revenue will keep pace with the targeted reduction in the use of coal and oil.

In recent years, India’s dependence on oil and gas for tax revenue has increased phenomenally. Compared with the budgetary estimate of gross total revenue, taxes on petrol, diesel and natural gas had a modest share of 4.3 percent in 2013-14, which went up to 5.4 percent in the following year, and jumped to 10.7 percent in 2015-16 as global crude oil prices fell sharply and taxes on fuels jumped. The share is now more than 12 percent of the gross total revenue as the government again raised taxes when global prices fell.

HNI Exodus

So, as the sun shines and the wind blows over India’s energy sector, tax collection will be a serious challenge. Going by past propensities of policy-makers, this may lead sky-high taxes on wealthy people and the middle class, along with creative surcharges on various levies as well as taxes on transactions in equities and commodities markets.

It will also prompt the government to intensify efforts to weed out black money. While this is also a laudable intention, the war against black money always has a major civilian casualty. Businessmen complain that they face tax terrorism when authorities are on an overdrive. This encourages many wealthy Indians to leave the country — a sad trend that is gaining momentum.

Already, India tops the list of countries from where wealthy people are relocating to countries that offer citizenship or right of residence in return for investments. A BBC report on the exodus of tycoons cited a Morgan Stanley study in 2018 that said 23,000 Indian millionaires had left the country since 2014. A recent Global Wealth Migration Review, said that in 2019, nearly 7,000 wealthy Indians, or about 2 percent of its High Net-worth Individuals, left the country.

With such people fleeing, and clean energy on track to replace the taxman’s darlings — coal and oil — the economy faces a serious challenge. The government will have to find new ways to generate tax revenue which will put even more pressure on its tycoons and the middle class, unless some innovative fiscal steps are taken after transparent consultation with economists and businessmen.

Tax Rebalancing

Future discussions on renewable energy must include serious deliberations on its implications for tax revenue and the fiscal health of the country, without which the transition would be troublesome. Sadly, policy-makers have so far not highlighted this issue.

One way out would be to go all out and reduce costs of clean energy so that the sector can absorb a good dose of taxes, but it would be impossible to tax it to the level of petrol, which is produced at a cost of about Rs 30 per litre and reaches the fuel tank at Rs 90 per litre.

Reducing the cost of renewable energy, to create room for taxation, would also require a liberal import regime, without jingoistic opposition to Chinese solar panels, which are much cheaper as its companies have invested in technology and have a global scale of production. It would also require policy flexibility and serious government support for major Indian business houses that have big ambitions in this sector.

Hidden Subsidies

Another problem with taxing clean energy is that these companies need to make decent profits so that they can invest in technology and meet Prime Minister Narendra Modi’s mission of making India a global manufacturing hub for the clean energy sector.

Getting revenue from solar and wind energy has another major challenge: The sector needs to be truly viable and profitable without hidden subsidies. While the government and many analysts have celebrated the achievement of the ‘grid parity’, where solar tariffs are about the same as the cost of conventional energy, clean energy is barely viable without various fiscal incentives.

Wind and solar energy plants have enjoyed numerous incentives. These includes tax holidays, accelerated depreciations, legal obligations by distribution companies to buy their output, and waiver of interstate transmission charges.

Several government schemes give users heavy subsidies for using solar equipment. A flagship government scheme to provide solar pumps to farmers for irrigation involves central assistance of 30 percent of the cost along with a similar dole by the state. For hilly states and the northeastern regions, the central subsidy is 50 percent.

These pumps will absorb a lot of subsidy to replace either diesel which gives the government the financial muscle to pay subsidy, or conventional power from coal-fired plants. Coal is also a major source of revenue, providing tens of thousands of crore in profits and taxes paid by Coal India and the coal cess levied on the fuel.

This is not to suggest that India and its taxmen should remain addicted to polluting liquid fuels. Certainly not. India has been applauded globally for seriously expanding its renewable energy capacity. Alarmingly high pollution is killing millions of Indians every year. So, the government must be applauded for vigorously pushing for rapid adoption of clean energy, but further steps in this direction must come with serious thoughts about the fiscal challenges and the solutions needed to overcome them.
Himangshu Watts
first published: Apr 16, 2021 11:53 am

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