Source: The post “Merits of user tax on infra services” has been created, based on “Merits of user tax on infra services” published in “BusinessLine” on 24th January 2026.
UPSC Syllabus: GS Paper-3- Economy
Context: Raising government revenue is challenging because direct taxes are politically sensitive, and GST rates have recently been lowered. A user-based tax on infrastructure-related goods and services like vehicles, telecom, railways, airlines, and freight can generate significant revenue without being a burden, as these goods are price inelastic, meaning demand is unaffected by small cost increases.
Merits of User Tax on Infra Services
- Revenue Generation: Even a small tax or cess on high-volume goods and services can raise substantial revenue, estimated at ₹20,000 crore. Given the large number of users for telecom, travel, and vehicle purchases, revenue accrues steadily over time.
- Minimal Consumer Impact: For a ₹75,000 two-wheeler, a ₹1,000 tax is only 1.3%, barely noticeable to the buyer. Similarly, ₹10 per mobile connection or per rail ticket is insignificant relative to the average revenue per user or ticket price, ensuring affordability.
- Price Inelastic Demand: Services like railways, airlines, and telecom continue to see stable demand despite price hikes, as evidenced by dynamic pricing in railways. Freight transport must happen irrespective of minor cost increases, ensuring predictable revenue.
- Limited Inflationary Impact: Components such as rail, air, or vehicles have low CPI weights (rail 0.18%, air 0.077%, vehicles 0.48–0.79%), so adding small taxes will barely affect overall inflation. This ensures the tax is non-disruptive to the broader economy.
- Sustainable and Flexible: Taxes can be graded by usage, class, or capacity (e.g., higher for cars, lower for two-wheelers). Periodic revisions are possible to stabilise revenue as demand patterns and infrastructure needs evolve.
- Encourages Efficient Usage: Small user charges may encourage judicious consumption, e.g., choosing an appropriate travel class or mobile plans. At the same time, essential services remain accessible due to low tax incidence.
Challenges
- Equity Concerns: Even small taxes can impact low-income users, especially for frequent users of public transport or mobile services.
- Implementation Complexity: Efficient collection across millions of transactions, especially for rail freight or telecom connections, requires robust digital systems.
- Resistance from Industry: Transport, telecom, and vehicle sectors may oppose additional charges, fearing reduced demand or administrative burden.
- Indirect Inflation Risk: Freight and transport taxes can increase goods costs, which might be passed on to consumers indirectly.
Way Forward
- Graded and Fair Taxation: Scale the tax based on vehicle type, travel class, or usage, so low-income users are minimally affected.
- Digital Collection Mechanism: Implement e-payment and automatic collection to reduce leakages and ensure transparency.
- Periodic Revision: Adjust charges periodically to match revenue needs and inflation trends without disrupting demand.
- Awareness and Communication: Publicise that funds will be used for infrastructure improvements to gain citizen support.
- Direct Link to Infrastructure Investment: Allocate revenue to roads, railways, airports, and telecom upgrades, ensuring transparency and accountability.
Conclusion: A user-based tax on infrastructure services leverages price-inelastic demand to generate sustainable revenue, minimally impacts consumers, and supports long-term infrastructure development. With grading, digital collection, and transparency, it can provide a stable funding source while remaining affordable.
Question: Discuss the merits of imposing a user-based tax on infrastructure-related goods and services. How can such a tax help in revenue generation without affecting consumption? Also, highlight its challenges and suggest ways forward.
Source: BusinessLine
