How GST is Promoting Environmental Sustainability?

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Published Date:  13-12-2023   Author:   moulik-jain
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GST is an indirect and comprehensive multi-stage tax charged on the supply of goods and services in India. The objective of GST was to simplify the tax regime by absorbing many Central and state-level indirect taxes in order to curb tax cascading to promote common economic space. Apart from these economic motivations, GST also has a great importance on environmental sustainability in India.

The GST and its contribution to green economy promotion, environmental protection, achieving UN development goals, and tax benchmarking for India. It contends that by virtue of its rates and exemptions structure, alongside revenue earmarking, GST could significantly impact sustainable production and consumption behaviors. Nevertheless, for this to happen, GST must be implemented together with other complementary policies.

GST and Green Economy

The green economy represents a new development paradigm that promotes environmental sustainability alongside economic progress. It encompasses sectors like renewable energy, electric mobility, green buildings, organic agriculture, eco-tourism and more. GST, with differential rates and exemptions, can provide strong signals to nudge the economy towards green and away from polluting sectors.

For instance, the GST Council has exempted renewable energy devices like solar panels, wind turbines, and biogas plants. It has also reduced rates on electric vehicles from 12% to 5% and for electric vehicle chargers from 18% to 5%. These moves encourage consumers to switch from fossil fuel-based alternatives to clean technologies. Similarly, services like solid waste management and sewage treatment have been exempted under GST to promote better waste management.

On the other hand, coal and other polluting fossil fuels face GST rates of 5% and 18%, while air travel and petroleum products also remain outside the GST ambit for now. Taxes on such sectors can be raised while providing exemptions for green alternatives to transition gradually towards a greener economy. Additional GST cesses could also be imposed on extremely polluting sectors like coal mining and thermal power generation.

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The transition to a green economy entails reducing environmental risks, promoting resource efficiency, generating green employment, and boosting low-carbon growth. GST can facilitate India’s shift to a green economy in the following ways:

  • Reducing Carbon Emissions

Goods attracting higher GST rates prompt producers to find less carbon-intensive ways to manufacture them to retain price competitiveness. Similarly, lower GST rates for renewable energy technologies like solar panels and wind turbines make them more affordable. This spurs their uptake, reduces fossil fuel consumption, and encourages the transition to green energy.

  • Promoting Renewable Energy

Renewable energy sectors like solar and wind energy are exempt from paying GST. This reduces their operating costs and allows them to offer competitive tariffs. Since clean energy is exempt while fossil fuels like coal and gas attract GST, it incentivizes renewable energy deployment.

  • Incentivizing Eco-Friendly Practices

GST concessions for businesses adopting environmentally friendly production methods promote sustainable manufacturing. Exemptions for green products make them affordable for consumers, while higher GST rates for environmentally harmful goods can discourage their consumption.

However, while GST makes eco-friendly goods cheaper, it also makes regular goods slightly expensive, which can dampen demand. Further, lower tax revenue due to exemptions needs to be balanced with higher budgetary support for GST administration.

GST and Environmental Protection

Beyond fostering greener economic activities, GST also directly influences environmental outcomes through the incentives and disincentives it creates around pollution, waste generation, and resource depletion. Activities that cause substantial environmental damage could be taxed at higher GST rates or be subject to additional cess. This would account for the negative externalities imposed and provide a pricing signal to reduce environmentally harmful practices.

For instance, non-biodegradable plastic packaging materials and containers face 18% GST, which encourages businesses to minimize plastic waste. Similarly, a-numero of goods identified as hazardous wastes that require safe disposal face a GST rate of 28%. Additional GST cesses have also been occasionally imposed on products like tobacco, automobiles, and coal to fund pollution abatement programs.

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However, critics argue that flat ad-valorem GST rates linked to product prices fail to capture the environmental impact of different production processes adequately. For example, conventionally grown cotton or wheat face the same 5% GST as their organic counterparts despite the latter’s lower footprint. An alternate tax design could provide differential rates or conditional exemptions based on meeting recognized environmental standards.

GST can aid environmental protection by reducing pollution and waste generation while promoting the conservation of resources. Key aspects include:

  • Discouraging Pollution

Petroleum products like petrol, diesel, and ATF, which are major air pollutants, attract substantial GST rates of 28-40%. This increases their prices, thereby reducing the demand for fossil fuels and associated emissions. Coal, another highly polluting fuel, also attracts GST at 5%.

Cesses like the Clean Environment Cess further raise the costs of pollution. Such price signals discourage emission-intensive activities and nudge the economy towards sustainability.

Hazardous chemicals, ozone-depleting substances, and various categories of waste also attract GST compensation cess. This makes waste disposal costlier and incentivizes producers to limit waste. However, critics argue that higher taxes disproportionately affect smaller enterprises and poorer consumers. It also fuels inflation, which dampens demand across all sectors.

  • Minimizing Waste

The E-waste recycling industry is fully exempt from GST, while waste processing services for material recovery attract 12% GST. This creates a favorable operating environment for the waste recycling industry.

GST also applies to plastic packaging and single-use plastics. Though essential for revenue, this makes plastic waste management expensive. Producing biodegradable packaging could emerge as a solution.

  • Protecting Resources

Commercial mining and production of minerals attract between 5% to 18% GST based on the type of minerals. Royalties on mining also supplement GST’s impact. This increases business costs but limits the unchecked extraction of finite mineral resources.

Water conservation services offered by specialized agencies attract only 12% GST compared to 18% GST for regular maintenance contracts. This encourages businesses to employ water-saving mechanisms.

GST and Sustainable Development Goals

The 2030 Agenda for Sustainable Development adopted by the United Nations envisions a prosperous planet where economic progress occurs in tandem with social inclusion and environmental sustainability. GST bears significant relevance for almost a dozen of the 17 Sustainable Development Goals (SDGs), from responsible consumption, climate action, and clean energy to sustainable industries, cities, and aquatic ecosystems.

For instance, GST measures can strongly supplement SDG 12, which focuses on responsible production and consumption patterns. Favorable tax rates on shared mobility, public transport, and agroforestry directly contribute to sustainable lifestyle choices, while differential rates create awareness around eco-friendly substitutes across sectors. GST can potentially contribute to the following green economy-related SDGs:

  • SDG 13: Climate Action

GST incentives for the transition to electric mobility, renewable energy expansion, energy efficiency, etc., directly enable climate change mitigation. Earmarking GST proceeds to fund electric vehicle infrastructure and clean energy programs would further SDG 13.

  • SDG 7: Affordable and Clean Energy

GST exemptions for renewable energy combined with compensation cess on coal and petroleum aid the progress of SDG 7. Budgetary allocation of GST revenue towards renewables-based affordable energy access for marginalized communities can accelerate achievements.

  • SDG 12: Responsible Consumption and Production

GST induces responsible consumption patterns by making environmentally harmful products more expensive through higher tax slabs. It also incentivizes businesses to adopt sustainable designs and green manufacturing processes through concessional rates. This advances SDG 12.

  • SDG 14 & 15: Life on Land and Water

Revenue from GST and environmental cess levied on industries causing air and water pollution can be utilized by the government for clean-up activities. Similarly, funds accrued from GST on commercial forestry and mining can facilitate afforestation and wildlife conservation programs in line with SDGs 14 and 15.

Nevertheless, the magnitude and scope of SDG targets warrant multi-sectoral, large-scale policy interventions rather than over-reliance on GST alone to deliver enabling conditions, infrastructure, and incentives.

GST and International Comparison

While GST has assisted environmental reform domestically, India can gain valuable insights by comparing its GST regime with international best practices on using taxation to achieve ecological sustainability:

  • European Union (EU)

The EU applies a minimum 15% Value Added Tax (VAT) on all goods and services, with lower rates between 5% and 10% on green products. Petroleum and energy also attract high VAT of 21 to 25% across EU nations. This is comparable to India’s GST approach.

  • Canada

Canada levies a carbon tax on greenhouse gas-emitting fuels to curb emissions, along with GST incentives for zero-emission technologies. India can similarly impose direct carbon taxes and channel GST revenues exclusively towards environmental protection programs to maximize impact.

  • Singapore

Singapore imposes differential excise taxes favoring green automotive technologies over conventional models, besides GST concessions. India could consider levying additional excise duties on large petrol and diesel vehicles.

  • New Zealand

New Zealand collects a higher GST of 15% but accompanies it with income tax rebates and carbon credits to offset increased fuel and energy costs for vulnerable groups. India must similarly insulate people with low incomes against higher inflation due to GST.

In summary, while India has adopted GST strategies akin to global precedents, more significant revenues can be raised and allocated through green cess, carbon taxes, excise duties on polluting technologies, and redistribution mechanisms for an eco-friendly transition.

Conclusion

GST holds noteworthy but under-utilized potential for promoting environmental sustainability in India by nudging producers and consumers towards green behaviors and penalizing polluting activities. Its environmentally progressive rate structure lowers the prices of clean technologies, increases the costs of unsustainable goods, and makes waste disposal expensive to stimulate the circular economy.

However, formidable political economy and revenue challenges inhibit steeper GST rates or broader exemptions solely for ecological objectives. Significant administrative coordination between the Centre, States, GST Council, and relevant Ministries is also essential to implement GST measures, track eco-fiscal performance, and allocate proceeds for green infrastructure and welfare schemes.

Nevertheless, integrated with emissions trading systems, carbon pricing, sector-specific taxes, and stringent environmental regulations, GST can play an important signaling role within the policy mix to build environmental costs into economic decisions.

Future GST reforms must focus on expanding concessional rates and exemptions for eco-friendly industry verticals, progressively increasing taxes on high pollution sectors, and dedicating a portion of GST green funds for sustainability programs to make the tax regime structurally geared to India’s ecological modernization.

Also Read: Impact Of GST On Environmental Sustainability In India

FAQ’s

  • How does GST promote the adoption of renewable energy in India?

GST provides exemptions or concessional rates for renewable energy generation and supply equipment like solar panels, wind turbines, and biogas plants. It has reduced rates on electric vehicles and charging infrastructure to 5% from 12-18% earlier. This encourages the transition towards clean energy and electric mobility, reducing fossil fuel consumption and emissions. However, polluting sectors remain lightly taxed, impeding green transition.

  • What GST rates apply to other green products or services in India?

Besides renewable energy, sectors like organic manure, biopesticides, eco-tourism, and waste recycling enjoy zero or low 5% GST rates. Urban mass transit systems, biofuels, and some biodegradable packaging are taxed at 12%. However, sectors like air and water transport, petroleum, and coal remain lightly taxed or even untaxed within the GST ambit currently.

  • How does GST discourage activities that cause pollution in India?

Higher 18% or 28% GST rates apply on environmentally damaging goods like non-biodegradable plastics, processes generating hazardous wastes, luxury cars with large engines, etc. However, GST needs more differentiation based on actual environmental impact during production and consumption lifecycles.

  • Can GST rates be conditional on meeting sustainability criteria?

Yes, the GST Council can prescribe conditional exemptions based on meeting recognized standards around organic labeling, water usage minimization, greenhouse gas emissions, etc. This can incentivize entire supply chains to implement environmental management practices beyond just green sectors.

  • Does GST align with India’s climate change and sustainability policy commitments?

GST reinforces national commitments under international accords like the Paris Agreement, Convention on Biological Diversity, etc. It also backs commitments under Sustainable Development Goals on energy access, responsible production, climate resilience, etc. However, gaps still need to be in comprehensively aligning GST with sustainability policies.

  • How does GST revenue contribute to India’s green transition?

Revenues from GST compensation cess on coal, tobacco, automobiles, etc., fund pollution abatement and environmental protection programs. Further, the center can allocate a share of GST revenues to state-level initiatives promoting renewable energy, public transport, waste management, etc.

  • What more can the GST Council do to promote sustainability in India?

The Council can undertake periodic lifecycle analyses of high-impact sectors to calibrate GST rates, balancing environmental and fiscal goals. It can provide clarity around input tax credits for waste collection/recycling activities. Conditional exemptions can be introduced to meet recognized green standards across sectors.

  • Should petrol, diesel, and natural gas be brought under the GST ambit?

Yes, fuel taxes are complex and distortionary and hamper India’s green transition. Subsuming petroleum products under GST can simplify fuel taxes, check emissions in high-taxed sectors, and allow for revenue-neutral growth towards cleaner electricity/green hydrogen.

  • Can India implement differentiated GST rates by level of environmental impact?

Yes, but actual environmental impact assessment across production, distribution, and usage lifecycles will require solid technical capacity within GST administration. Sector regulatory bodies like CPCB, BEE, and state pollution boards need closer GST policy coordination.

  • What can India learn from global best practices on using taxation to enable sustainability?

Many countries implement differential VAT/GST rates exemptions on sustainable goods/services like renewable energy, biofuels, green buildings, etc., while taxing polluting sectors. India can draw lessons from such market-based instruments while balancing fiscal and environmental priorities locally.

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Moulik Jain

I am a seasoned marketer specializing in Tax, Finance, and MSMEs who brings a wealth of hands-on experience to demystify complex subjects, providing insightful guidance for entrepreneurs and finance enthusiasts alike.

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This Post Has 2 Comments

  1. Liana

    thanks for info