Examining the role of Direct Taxes in Non Biodegradable Waste

Management in India

Rajiv V. ShahT. A. Pai Management Institute,

Manipal, India

T. A. Pai Management Institute, Manipal, India

If you drive a car I’ ll tax the street.If you try to sit I’ ll tax your seat.If you get too cold I’ ll tax the heat.If you take a walk I’ ll tax your feet.• Beatles- Taxman.

(If you pollute, I’ll tax the smokeBut if you clean up, I’ll give till I’m broke‘Cause I need you to understandThat messin’ with Mother Nature ain’t no joke!!)

T. A. Pai Management Institute, Manipal, India

Role of Taxation• Raise tax revenues to finance public expenditure• Redistribute income from rich to the poor • Provide incentives and disincentives for various

behaviour.

• While the primary role of any taxation system is to raise revenue to fund the general functions of government,

• an important policy objective is to enhance overall economic well being,

• while promoting fairness, and continuing to raise sufficient revenue at the same time.

T. A. Pai Management Institute, Manipal, India

• Taxes are raised in two ways: directly and indirectly. The indirect taxes are a tax on production or activity which could also mean consumption. These would be ultimately borne by the consumer, irrespective of his level of income. This makes it regressive to an extent, where the poor tend to pay more taxes as a percentage of their total income.

• Direct taxes are more progressive, whereby the taxpayer pays according to the level of income.

• Worldwide, “green taxes” as they are known, are mainly taxes of the indirect kind, mainly at the production and/or sales stage. They would be akin to excise duties, cesses, levies on sales, etc.

T. A. Pai Management Institute, Manipal, India

A.C. Pigou - ‘Economics of Welfare’, 1920

• Negative externalities caused by pollution would be internalized by the market if polluters paid a tax equal to the marginal social cost of polluting emissions.

• While there have been differences on whether the tax should be lower or higher than the marginal social cost of pollution,

• the need for this form of tax is generally well accepted • A rise in environmental activism can be productive only if

matched by rise in corresponding taxes. (Aidt,1999)

T. A. Pai Management Institute, Manipal, India

Still on Pigouvian taxes• ‘Pigouvian taxes’, as these green taxes are known as, can

encourage smuggling and black market activities, especially if there are large differences in product prices with those in nearby areas.

• Also, if lower income groups spend a greater portion of their income on products with external social costs, such as electricity, tax is regressive.

• Option is: Regulation• With a Pigouvian tax there is always an incentive to reduce

pollution, whereas with direct regulation, a polluting company has no incentive to pollute any less than what is allowable.

T. A. Pai Management Institute, Manipal, India

Double dividend hypothesis

• talks of taxing polluting activities and using the increased revenues to offset a reduction in taxes on salaries.

• This would pay double dividends in the form of – raising more revenue for the government (green dividend) and – increase environmental quality (efficiency dividend)) (Goulder

1995)• "triple dividend" which is the double dividend plus an

increase in profits. (Bovenberg and van der Ploeg,1996)

T. A. Pai Management Institute, Manipal, India

Only Sticks? No Carrots?• While the approach to green taxes has mostly been the ‘stick’ one,

the ‘carrot’ part should not be ignored. Incentives such as subsidy schemes for reducing emissions, soft loans to buy capital equipment, etc. are equally effective (Ligthart, 1998)

• Tax incentives should encourage demand rather than aid supply (Mann, Hydel, 2006)– Example: Subsidy in electricity bills for solar heaters, wind energy,etc.

• Specific deductions are better than general deduction (Douglas R., 2002)

T. A. Pai Management Institute, Manipal, India

Redistributing the collected revenues

• Options:– Reduce Income taxes on salaries– Provide subsidies to businesses engaged in

producing alternatives to ‘bad’ products– Provide tax deductions on profits to such

businesses (abatement incentives)– Spend on promotion of smart energy usage,

conservation, etc.

T. A. Pai Management Institute, Manipal, India

About India

• Very few Environmental Taxes as such• However, tax rates on many products mimic

ET effects (high tax rates)• Levying ET on some products could be quite

unsettling, politically• Small amount of support to environmental

innovative technology ( in pockets)• Moderate rate of salary taxes, again politically

tempting to reduceT. A. Pai Management Institute,

Manipal, India

Plastic waste in India (CPCB)

• The quantum of solid waste is ever increasing due to increase in population, developmental activities, changes in life style, and socio-economic conditions,

• Plastics waste is a significant portion of the total municipal solid waste (MSW). It is estimated that approximately 10 thousand tons per day (TPD) of plastics waste is generated in the country.

T. A. Pai Management Institute, Manipal, India

Plastic waste in India- Environmental hazards

– Garbage containing plastics, when burnt may cause air pollution by emitting polluting gases;

– Garbage mixed with plastics interferes in waste processing facilities and may also cause problems in landfill operations;

– Littered plastic waste spoils the beauty of the place, chokes drains

– Recycling industries operating in non-conforming areas posing hygiene related problems

T. A. Pai Management Institute, Manipal, India

Options for Plastic Waste Management

• Plastics recycling technologies have been historically divided into four general types –

• Primary recycling involves processing of a waste/scrap into a product with characteristics similar to those of original product.

• Secondary recycling involves processing of waste/scrap plastics into materials that have characteristics different from those of original plastics product.

• Tertiary recycling involves the production of basic chemicals and fuels from plastics waste/scrap as part of the municipal waste stream or as a segregated waste.

• Quaternary recycling retrieves the energy content of waste/scrap plastics by burning / incineration.

T. A. Pai Management Institute, Manipal, India

Options to manage the waste- in practice

• Polymer coated bitumen roads• Plastics waste disposal through Plasma Pyrolysis• Technology (PPT)• Conversion of Plastics waste into Liquid Fuel• Biodegradable Plastics

• Reasons why these options are not taking off:– Cost of technology– Output not necessarily safe– Lack of awareness– Unwillingness to be ‘the first’– Not financially viable

T. A. Pai Management Institute, Manipal, India

How can a Direct Tax policy help?

• Option one: At source– Since cost of technology is an issue, there could be

weighted average deduction for companies willing to invest in R&D in this area. This should necessarily be different from the current general provisions

• Option Two: Somewhere in between– An accelerated rate of depreciation for businesses

using these machines- currently available for windmills, etc.

T. A. Pai Management Institute, Manipal, India

How can a Direct Tax policy help?

• Option three : At the bottomline– A tax deduction on profits derived from these

businesses- currently available for businesses using bio degradable waste, generating power, etc.

T. A. Pai Management Institute, Manipal, India

Rates of depreciation• Buildings acquired for installing machinery and plant forming part

of water supply project or water treatment system : 100%

• Energy saving devices; renewal energy devices: 80%

• Air pollution control equipments; water pollution control equipments; solid waste control equipments, recycling and resource recovery systems; machinery acquired and installed in a water supply project or water treatment system or for the purpose of providing infrastructure facility; ….

100% (Appendix 1 & 1A to the Income-tax Rules, 1962)

T. A. Pai Management Institute, Manipal, India

Common deductions

• Available to all businesses if certain conditions met: Upto 100% of profits deductible.

• Expenditure on scientific research and development - 125%

• Benefits should also be in the form of specific deductions, which directly relate to conservationist activities, as opposed to general deductions, which could be taken advantage of by all industries (Douglas, 2002)

T. A. Pai Management Institute, Manipal, India

Conclusion• A Direct Tax Policy can be a more effective tool for

furthering the environmental cause as it deals with benefits and deductions and not penalties and levies.

• It appears better than a raw subsidy since the need for a business to engage in creating positive externalities is higher

• Again the business has a higher interest in availing these benefits as they accrue directly to the business itself. The penalties and levies, on the other hand, can be easily passed on to the consumer and hence the actual polluter is rarely taxed.

T. A. Pai Management Institute, Manipal, India

THANK YOU

T. A. Pai Management Institute, Manipal, India