MARCH 4, 2010

Abort Coal Cess & review all energy taxes

By TIOL Edit Team

BOTH the Union Budget and the Finance Commission's Report have one thing in common. Both documents are wanting in the vision for an integrated energy policy (IEP), which is crucial for the country's economic efficiency and competitiveness.

Neither document contains any initiative to implement IEP that was approved by the Cabinet in December 2008. The term IEP neither figure in Finance Commission's report nor in the budget speech.

IEP report, which was released in August 2006, stated “Central and State taxes on commercial energy supplies need to be rationalised to yield optimal fuel choices and investment decisions. Relative prices of fuels can be distorted if taxes and subsidies are not equivalent across fuels. This equivalence should be in effective calorie terms.”

Instead of acting on this guiding principle, the Union Budget has proposed levy of a cess of Rs 50/tonne on both domestic and imported coal. This cess has ostensibly been proposed to generate funds for proposed National Clean Energy Fund (NCEF), which would finance “clean research and innovative projects in clean energy technologies.”

As the proceeds of all earlier such levies go to the Consolidated Fund of India, they get utilized for purposes other than intended. On paper, the Government, however, show that tonnes of cess money that remains unutilized or unallocated to the intended projects.

This has been amply borne by the cess on domestic crude. The Ministry has been levying cess on crude since 1974 ostensibly to finance development of the hydrocarbons sector. It increased the cess from Rs 60/tonne to Rs2500/tonne. Of the total proceeds of Rs 88,198 crore of this cess, only Rs 902 crore was allocated to Oil Industry Development Board (OIDB).

The Government could have diverted unutilized crude cess to projects for development of clean energy technologies. It could have utilized proceeds of R&D cess which has been levied on technology imports since 1986 to fund development of indigenous technologies.

That there was no need for clean energy cess is obvious from the fact that the Ministry of New and Renewable Energy meant to facilitate development of clean and green energy technologies.

The coal cess is thus completely avoidable. Moreover, it can vitiate the country's march towards goods and service tax (GST) and harmonious Centre-State fiscal relations. Finance Commission has recommended that that all cess and surcharges should be subsumed in Central GST.

The Commission expressed concern over the Centre's tendency to increase its kitty of non-divisible resources through the mechanism of cess and surcharges, most of which are not sharable with the States.

As it is, Certain States have either levied or plan to levy cess under different labels to control pollution and or to fund development of green technologies. Delhi Government, for instance, levies an Air Ambience Fee of 25 paise per liter on sale of diesel “to create Air Ambience Fund for promotion of clean fuel technologies.”

Karnataka Government has proposed to levy green cess on all industries to raise funds for development of renewable energy projects.

The States should not forget that the Finance Commission's award provides for Rs 5000 crore “incentive grant” to them for development of grid-connected renewable energy projects.

The Centre must set an example in ensuring that clean technologies do not become victim of cess fiscal games in the country.

Reverting IEP, it had proposed setting up of A National Energy Fund (NEF) with a budgetary allocation of Rs 1000 crore in the first year. It did not propose any cess.

The proposed cess on coal creates an erroneous impression that coal is a polluting fuel. The polluting potential of any fuel depends on how it is used. There are plenty of clean coal technologies that have not been adopted in the country primarily due to cost factor.

Instead of levying cess on coal, the Centre should mandate as well as facilitate setting up of clean coal-technology based projects for generation of power and synthesis gas.

The Centre and the States should use GST to create a level-playing field to all forms of energy.

The Finance Commission has, however, given a handle to the governments to exclude three transportation fuels from the scope of multiple taxes. It has recommended levy of additional tax on three transportation fuels over and above GST. It has proposed that this additional tax should be levied by both the Centre and the States to protect their revenue and in the process ensure environmental protection.

Similarly, the governments should put all mined fuels on equal footing as regards levy of royalty, which is out of the purview of GST.

Apart from putting all types of energy on GST parity, the Centre should carefully review all direct taxes and concessions available to developers of different forms of energy. At present, even within the renewable energy sector, one form of energy development gets tax preference over another. We hope the Direct Tax Code would address this issue.

It is high time the Centre and States develop an integrated energy that should create level-playing field for all sources of energy. As long as there are tax distortions, untargeted subsidies, politics-influenced pricing delays, the integrated energy policy would remain a mere wish.