Tax Reforms

Benefits of environmental fiscal reforms


From UPSC perspective, the following things are important :

Prelims level : Not much

Mains level : Paper 3- Benefits of environmental tax

The article highlights the advantages of environmental fiscal reforms in India.

Status of  out-of-pocket spending on health in India

  • As per WHO data, in 2011,  17.33% of the population in India made out-of-pocket payments on health that was more than 10% of their income.
  • The percentage was higher in rural areas compared to urban areas.
  • Globally, 12.67% of the population spent more than 10% of their income (out of their pocket) on health.
  • In Southeast Asia, 16% spent more than 10% of their household income on health.
  • Similarly, 3.9% of the population in India made more than 25% of out-of-pocket payments on health, with 4.34% of it in the rural areas.

Alternate source of health financing: Eco tax

  • The Economic Survey of India 2019-20 has outlined that an increase in public spending from 1% to 2.5-3% of GDP, can decrease out-of-pocket expenditure from 65% to 30% of overall healthcare expenses.
  • The National Health Policy of 2017 also envisages increase in public spending from 1% to 2.5-3% of GDP.
  • This is where the importance of alternate sources of health financing in India needs to be stressed.
  • Fiscal reforms for managing the environment are important, and India has great potential for revenue generation in this aspect.

Environmental tax reforms

  • Environmental tax reforms generally involve three complementary activities:
  • 1. Eliminating existing subsidies and taxes that have a harmful impact on the environment;
  • 2. Restructuring existing taxes in an environmentally supportive manner;
  • 3. Initiating new environmental taxes.
  • Taxes can be designed either as revenue neutral or revenue augmenting.
  • Revenue augmenting model: In case of revenue augmenting, the additional revenue can either be targeted towards the provision of environmental public goods or directed towards the overall revenue pool.
  • In developing countries like India, the revenue can be used to a greater extent for the provision of environmental public goods and addressing environmental health issues.

Eco tax

  • The success of an eco tax (environment tax) in India would depend on its architecture, that is, how well it is planned and designed.
  • It should be credible, transparent and predictable.
  • Ideally, the eco tax rate ought to be equal to the marginal social cost arising from the negative externalities associated with the production, consumption or disposal of goods and services.
  • This would include the adverse impacts on the health of people, climate change, etc.
  • The eco tax rate may, thus, be fixed commensurate to the marginal social cost so evaluated.
  • There is also a need to integrate environmental taxes in the Goods and Service Tax framework.

In India, eco taxes can target three main areas

  • One, differential taxation on vehicles in the transport sector purely oriented towards fuel efficiency and GPS-based congestion charges.
  • Two, in the energy sector by taxing fuels which feed into energy generation.
  • Three, waste generation and use of natural resources.

Benefits of implementation of eco taxes

  • The implementation of an environmental tax in India will have three broad benefits: fiscal, environmental and poverty reduction.
  • Finance basic public services: Environmental tax reforms can mobilise revenues to finance basic public services when raising revenue through other sources proves to be difficult or burdensome.
  • Reduce distorting taxes: It can can also help to reduce other distorting taxes such as fiscal dividend.
  • Finance research: Environmental tax reforms help internalise the externalities, and the said revenue can finance research and the development of new technologies.


  • Environmental regulations may lead to slow productivity growth and high cost of compliance in private sector.
  • This could result in the possible increase in the prices of goods and services.
  • However, the European experience shows that most of the taxes also generate substantial revenue and there is no evidence on green taxes with sustainable development goals leading to a ‘no growth’ economy.
  • Negligible impact on GDP: Most countries’ experiences suggest negligible impact on the GDP, though such revenues have not necessarily been used for environmental considerations.
  • The negligible impact on the GDP may be a temporary phenomenon.


This is the right time for India to adopt environmental fiscal reforms as they will reduce environmental pollution and also generate resources for financing the health sector.

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