News Update

Revisit Tax Reforms to promote 'resources' use efficiency

JULY 22, 2017

By TIOL Edit Team

NITI Aayog has pitched for tax reforms as an integral component of its two policy visions- Draft National Energy Policy (DNEP) and Strategy Paper on Resource Efficiency (SPRF). Both these documents were unveiled recently for seeking public comments.

DNEP has called for removal of pricing and taxation distortions to facilitate enhanced competition in marketing and consumption of electricity, natural gas and liquid fuels including liquefied natural gas (LPG).

Similarly, recycling and reuse-focused SPRF has recommended that taxation rates should be "differentiated to promote a market for recycled content based products".

Both documents, however, have failed to specify taxation reforms. They have not taken a holistic view of all related issues. DNEP, for instance, is silent on the adverse impact of non-application of goods and service tax (GST) on crude oil, motor spirit (petrol), high speed diesel, natural gas and aviation turbine fuel.

This is in spite of detailed memoranda submitted by Federation of Indian Petroleum Industry (FIPI) including one on differential GST on LPG cylinders, creating risk for diversion of domestic-use LPG cylinders to commercial establishments.

In its inputs for DNEP submitted in November last year, FIPI (formerly Petrofed) had pointed out that "GST would be applicable on most of the inputs goods and services for oil and gas companies, while the end-products (petroleum products and natural gas) would continue to be levied under CST/ VAT regime, and hence the sector would end up with a hybrid regime. This is likely to result in breakage in credit line between the input and output taxes of oil &gas companies resulting in cost increase either for oil and gas companies or the end consumers of petroleum and petroleum products ."

The fact is that the Centre and the States never made any effort to reform tax rates to level-playing field for all sources of energy, promote efficiency-based choice of fuels and make economy globally competitive.

DNEP's suggestion to tax industrial consumers of power to raise resources for subsidizing electricity to residential and poor consumers must be dropped. As it is, high cost of power is major hurdle in ‘Make In India' initiative especially in the setting up of energy-intensive industries.

DNEP says: "Currently, industrial customers are charged a price well above the average cost of electricity generation. This excess helps finance below-cost prices charged to other customers. The same cross subsidy can be provided under the proposed system by taxing the purchases of electricity by industrial customers andusing the tax proceeds to subsidize vulnerable customers. An advantage of this arrangement is that it is far more transparent than our current practice".

Time has come for the Governments to stop pushing its vote bank-oriented social welfare agenda on the back of employment-generating entities. The cost of social welfare should be financed from the general exchequer that gets proceeds from all sorts of tax and non-tax revenue streams. Simultaneously, Neta-Babu combine must learn to rein in its lust for regular hikes in wages, perks and privileges. Such restraint, if followed, can spare resources that can be used for subsidizing power and cooking fuel to people living below the poverty line.

According to NITI Aayog, DNEP builds on the achievements of the earlier omnibus energy policy – the Integrated Energy Policy (IEP), and sets the new agenda consistent with the redefined role of emerging developments in the energy world.

DNEP has not disclosed what IEP achieved on taxation and other policy fronts. It has not disclosed why it has not opted for revised/new IEP instead of diluting focus on integration of energy markets under NEP label.

IEP, which was approved by the UPA Cabinet in December 2008 , says: "Taxes should be neutral across energy sources except where differentials in taxation across energy sources are specifically intended to counter differential externalities, such as those reflecting environmental externalities".

IEP adds: "both direct and indirect tax policy should be neutral across alternative energy sources except where differences are justified on economic grounds. Taxes and subsidies should be equivalent across fuels in effective calorie terms so that producer and consumer choices as to which fuel and which technology to use are not affected by taxes and subsidies ."

It also advocates that regulatory philosophy applied in each energy sector should be consistent with the overall energy policy. It should provide a level playing field to all players , whether public or private.

Has this objective been achieved? No. An obvious instance of discrimination against private sector is its exclusion from the domain of exploration and production of shale oil and gas.

Modi Government must thus first issue an evaluation of IEP before finalizing NEP. It should also consider setting up of super-energy regulator – Integrated Energy Regulatory Commission. The proposed Commission, comprising all sector-specific regulators, should be empowered to streamline and harmonize all sector-specific energy policies.

This approach is missing in DNEP. It says: "Recognising that technology and markets are fast integrating energy into a commodity market, sub-sector energy Regulators will have to guide their energy sources into a common market. While in the immediate, the role of each Regulator may vary, several functions may be uniformly dispensed by all of them, such as that of HSE (Health, safety and environment)".

The Government should also issue a draft resource efficiency policy, covering all major resources, products and services. After all, the key to economic growth and exports boom lies in efficient use of all resources including time.