With limited scope to increase traditional taxes, the idea of a comprehensive pollution tax is emerging as a new revenue avenue.

Rationale for Exploring a Pollution Tax

• Shrinking Fiscal Space: Tax rationalisation and slower nominal GDP growth are reducing the scope for higher tax revenues through conventional means.
• Non-Negotiable Expenditure: Social sector spending and capital expenditure commitments have increased and cannot be rolled back.
• Limits of Central Bank Transfers: Over-reliance on central bank surpluses amounts to indirect monetisation and is not sustainable.

Concept Behind a Pollution Tax

• Pigouvian Foundation: A pollution tax is based on Pigou’s principle of taxing negative externalities created by economic activity. 
  • Since pollution harms society, the polluter whether it is the producer or consumer must bear the cost.
• Distinct from Carbon Trading: Unlike “cap-and-trade” systems that permit trading of emission rights, a pollution tax directly levies a charge on polluting activity.
• Dual Purpose: It ensures all polluters pay, making the system democratic. 
  • If polluters shift to cleaner alternatives, revenues may fall, but overall environmental quality improves.

Approaches to Implementing a Pollution Tax

• Taxing Pollution Through Financial Indicators: A direct tax approach can link pollution intensity to the ratio of power and fuel expenses to turnover. 
  • Since these details are already available in the company’s profit and loss accounts, implementation becomes straightforward.
• Using the Pollution Index Classification for Differential Rates: Industries are already categorised as red (60+ score), orange (41–59), green (21–40), and white (≤20). These scores can guide pollution tax slabs.
• Clarifying Classification for Multi-Product Firms: When companies produce multiple products, classification requires clear criteria. 
  • A revenue threshold such as 51% or 33% of turnover from a specific product can identify the dominant polluting category.
• Avoiding Offsets and Allowances: Allowing Corporate Social Responsibility (CSR) or mitigation related offsets may lead to tax arbitrage. 
  • A simple, non-negotiable tax on pollution-causing activity ensures fairness and administrative simplicity.
• Consumer-End Pollution Levy: A tax on goods and services that cause pollution encourages consumers to shift to cleaner alternatives.
• High Revenue Potential: A ₹1/litre fuel levy can raise about ₹15,000 crore yearly, while a ₹100 air-ticket surcharge can generate around ₹2,000 crore.
  • However, levying pollution taxes on essentials like fuel may add to inflation, requiring careful balancing.

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Phased Introduction and Sectoral Priorities

• Targeting High-Polluting Sectors First: Initial focus can be on sectors like fuel and power, fashion, livestock, transport, data centres, construction, plastics, and chemicals.
• Agriculture and Livestock: Pollution from farming and livestock is hard to tax because the sectors are largely unorganised, and imposing levies without carefully designed exemptions risks significant social and political backlash.
• Administrative Ease: Early phases should target industries where compliance and monitoring are simpler.

Conclusion

A pollution tax offers the government a sizable, sustainable alternative revenue stream. It can drive behavioural change, promote cleaner production and consumption, and gradually reduce pollution levels across the economy.

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