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The many benefits of an eco-tax in India


The COVID-19 pandemic has also forced countries all over the world to rethink climate change and the need for preservation of the environment. Fiscal reforms for managing the environment are important, and India has great potential for revenue generation in this aspect.


GS-III: Environment and Ecology (Steps for Pollution Control, Conservation of the Environment), GS-II Polity and Governance (Government Interventions), GS-III: Indian Economy

Mains Questions:

In the context of the additional burden on India’s health sector, discuss the need and benefits of imposing ecotax. (10 Marks)

Dimensions of the Article:

  1. Financial impact of the pandemic
  2. Consequences of low public expenditure in the health sector
  3. Understanding Eco tax / Environment Tax reforms
  4. Benefits of Eco-Tax
  5. Recently in news: Green Tax

Financial impact of the pandemic

  • The second wave of the pandemic has induced lockdowns in several states and brought economic activity to a standstill. This will lead to a lower than estimated economic growth and a subsequent decline in tax revenue. This will lead to a larger than projected fiscal deficit in the current year.
  • The fiscal deficit for FY 2020-21 (revised estimates) is projected to be 9.5% of the GDP; for 2021-22, it is pegged at 6.8%.
  • The continued focus on fiscal discipline is bound to impact public expenditure which is vital for economic revival and also impact expenditure into the ailing health sector which is crucial in the fight against the pandemic.

Consequences of low public expenditure in the health sector

  • The low public expenditure into the health sector results in the lack of adequate and quality public health care facilities, thus leading to the rise of private health care centres. Such a scenario invariably leads to a high out of pocket expenditure for health needs.
  • The World Health Organization (WHO) data notes that 17.33% of the population in India made out-of-pocket payments on health exceeding 10% of the total household expenditure or income in 2011.
  • This is higher than the global average of 12.67% and also the average for the Southeast Asian region which stands at 16%.
  • Similarly, 3.9% of the population in India made more than 25% of out-of-pocket payments on health.
  • The Economic Survey of India 2019-20 notes that an increase in public spending from the current level of 1% to 5-3% of GDP, as envisaged in the National Health Policy of 2017, can decrease out-of-pocket expenditure from 65% to 30%.
  • The high out of pocket expenditure for health pushes many into poverty. Also, since a lower proportion of disposable income is available for other essentials like food and education, this would also have a long-term impact on the nutritional security and development of children of such families.

Alternative source of Financing and Environment

  • Given the critical need for higher public expenditure in the health sector and the fiscal strain imposed by the pandemic, it becomes important to look for alternate sources of health financing in India.
  • The COVID-19 pandemic has also forced a rethink on climate change and the need for environmental preservation.
  • Environmental tax/Eco-tax is one of the alternative sources of financing to improve the health sector in India.

Understanding Eco tax / Environment Tax reforms

  • Environmental tax reforms would mainly involve the following three 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.
  • For example, in the energy sector, the following reforms may qualify as environmental fiscal reforms:
    1. Correcting the price differential between diesel and petrol.
    2. Differential taxation on vehicles in the transport sector based on fuel efficiency and GPS-based congestion charges.
    3. Taxes on thermal-based powers and tax rebates for renewable energy producers.
    4. Tax on high carbon footprint industries.

Different types of Environmental Regulation

Environmental Regulation can be of the following types:

  1. Command and control approach wherein the government places strict regulations on pollutant emissions and there are fines on non-compliance.
  2. Economic planning/urban planning approach involves inculcating sustainable management practices in policymaking.
  3. Environmental tax (eco tax)/subsidies approach involves either taxing the polluters to disincentivize the use of high carbon footprint processes or products and also providing subsidies to encourage the adoption of green technology.
  4. Cap and trade approach involves the government setting limits for emissions and the establishment of carbon trade markets.

India currently focuses majorly on the command-and-control approach in tackling pollution.

Benefits of Eco-Tax

  • Environmental taxes help internalise the negative environmental externalities in the overall framework and thus incentivize greener products and processes and disincentivize polluting processes and products. This will reduce environmental pollution, encourage environmental preservation and adoption of an environmentally sustainable approach.
  • Tax revenues can be generated through eco taxes by designing them as revenue augmenting.
  • The additional revenue so generated can be used for the provision of environmental public goods or directed towards the overall revenue pool to be used in critical social sectors like health. This will help developing countries like India, constrained by limited fiscal space to address critical environmental health issues.
  • The augmented revenue from eco tax can finance research and the development of new technologies thus encouraging the rise of new sunrise sectors and new jobs.
  • The augmented revenue will also help finance social sectors which will aid in the development process and help reduce poverty.


Environmental regulations may have significant costs on the private sector in the form of the high cost of compliance. This could lead to a possible increase in the prices of goods and services. This may disincentivize demand and thus hamper the economic growth of the nation.

Recently in news: Green Tax

In general, a green tax is imposed on the environment polluting goods or activities, to discourage people from anti-ecological behaviour and make them sensitive towards the environment.

What is India’s Green Tax on Vehicles?

  • A green tax imposition in India is a recent development, and different vehicles are being monitored for emissions, especially at state border areas.
  • An ECC (Environmental compensation charge) is imposed on different vehicles, both personal and commercial, depending upon their size.
  • The green tax varies from state to state. For instance, in Maharashtra, private vehicles that are more than 15 years old or more and commercial vehicles aged 8 years or more are liable to pay the tax.
  • Personal vehicles will be charged a tax at the time of renewal of Registration Certification after 15 years.

More about the Latest Proposal

  • The proposal on green tax also includes steeper penalty of up to 50% of road tax for older vehicles registered in some of the highly polluted cities in the country.
  • The levy may differ depending on fuel (petrol/diesel) and type of vehicle. The proposal will now go to the States for consultation before it is formally notified.
  • It includes 10-25% of road tax on transport vehicles older than eight years at the time of renewal of fitness certificate.
  • The proposal on green tax also includes steeper penalty of up to 50% of road tax for older vehicles registered in some of the highly polluted cities in the country.

-Source: The Hindu

December 2023