Greening of the GST – The environmental dimension of taxes must rank high in any rate rationalisation exercise

Source: The post is based on the article “Greening of the GST – The environmental dimension of taxes must rank high in any rate rationalisation exercise” published in the Business Standard on 8^th November 2022.

Syllabus: GS – 3 – changes in industrial policy and their effects on industrial growth.

Relevance: About greening the GST.

News: As the Goods and Services Tax (GST) has stabilised after the pandemic, it is time for rate rationalisation. This will help in both revenue buoyancy and a simpler rate regime. Further, India can also think of greening the GST.

What are the various reforms proposed for reforming GST?

A committee on Dual Control, Threshold and Exemptions was created by the earlier empowered committee of state finance ministers. This committee recommended a) India should move towards a three-tier rate structure. Such as 1) Merit rate at 8%, 2) Standard rate at 16%, and 3) Demerit rate at 30%, b) The GST exemptions need to be broadly phased out. Such as including aviation turbine fuel and natural gas in the GST net. India should create a limited list of items under exemptions.

What are the other changes required for greening the GST?

Reform the coal sector: 1) The government should limit the use of cess on coal for GST compensation to states. Instead, the government has to use the amount in pursuing cleaner coal technologies, 2) India’s increasing coal demand should be met by deep coal mining instead of open-cast mining. This is because coal from deeper layers emits less carbon dioxide per unit.

Utilise plastic waste: 1) Incentivise plastic scrap usage in road constructions and establish alternative usage for recycled plastic waste, 2) Create tax incentives, especially GST incentives, for promoting plastic waste recycling, 3) Setting up a technology mission to promote plastic recycling and finding alternative usage for recycled plastics.

All these will make the policy ban on plastics more effective.

Promoting renewables: 1) Bringing down the GST rates on a range of components, consumables and spares used by the renewable sector, 2) 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 to jointly provide a green rating for all the equipment that helps in the promotion of the renewable sector.

How do these changes help in evolving GST?

The above changes will ensure that a) The merit rate also has an environmental dimension. Thereby influencing the allocation of resources, and b) Fixing the rate for individual items becomes more transparent and based on broad principles.

India needs to remember that Greening the GST is only a small step in India’s fight against climate change.