Time is ripe for a pollution tax

It can be a major alternative revenue stream for the govt; it will bring in more consciousness within society and help reduce overall levels of pollution

- MADAN SABNAVIS

WITH RATIONALISATION OF both direct and indirect tax rates this year, the Budget is betting on higher buoyancy in income to ensure the tax revenue increases.

It is also seen that growth in nominal GDP can no longer be assumed to be 11-12%. With deflation in several product segments, nominal growth was less than 10%. At the same time, the expenditure commitments on social welfare as well as capex has increased over time, which cannot be lowered. This may be the right time to explore new avenues of revenue. Besides, there cannot be over-reliance on central bank transfers as such funding tends to amount to monetisation.

Here, a cue could be to introduce a comprehensive pollution tax. The concept is not new, as there are vibrant exchanges which trade in carbon credits. However, the idea here is more Pigouvian in nature—any polluting activity needs to be taxed. Arthur Cecil Pigou was an English economist who espoused the imposition of a tax on any negative externality caused by economic activity. Pollution is a clear case where society in general gets affected. Hence, the concept of tax moves away from the commercial variety of “cap and trade”—here, the idea is to directly tax either the producer or consumer of a product or service which causes pollution.