Daily Editorial Analysis for 24th May 2021

The many benefits of an eco-tax

Why in News

• The Indian government announced a pandemic ­related stimulus package in FY 2020­-21 though there was large decline in tax revenue.
• The fiscal deficit for FY 2020­21 is projected to be 9.5% of the GDP; for 2021­22, it is pegged at 6.8%.
• The focus is on maintaining fiscal discipline. In this peculiar scenario, sustained health financing in India remains a challenge.

Household spending on health

• The World Health Organization (WHO) provides data on the percentage of the total population where the household expenditure on health was greater than 10% and 25% of the total household expenditure or income in India in 2011.
• As far as health expenditure above 10% is concerned, 33% of the population in India made out of pocket payments on health.
• The percentage was higher in rural areas compared to urban areas. Globally, the average was 12.67%, which means that 67% of the population spent more than 10% of their income on health. In Southeast Asia, 16% spent more than 10% of their household income on health.
• The Western Pacific region came second in the list of regions that saw a rate higher than the global average.
• Similarly, 9% of the population in India made more than 25% of out-of-pocket payments on health, with 4.34% in the rural areas.
• According to the Economic Survey of India 2019-20, an increase in public spending from 1% to 2.5­3% of GDP, as envisaged in the National Health Policy of 2017, can decrease out-of-pocket expenditure from 65% to 30% of overall healthcare expenses.
• The COVID­19 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.

Fixing the eco rax rate

• Environment regulation may take several forms: command and control; economic planning/urban planning; environmental tax (eco tax)/subsidies; and cap and trade.
• India currently focuses majorly on the command-and-control approach in tackling pollution.
• The success of an eco-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.
• 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; and
3. Initiating new environmental taxes.

• Taxes can be designed either as revenue neutral or revenue augmenting. 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 issue.
• In India, eco taxes can target three main areas:

1. Differential taxation on vehicles in the transport sector purely oriented towards fuel efficiency and GPS­ based congestion charges;
2. In the energy sector by taxing fuels which feed into energy generation; and
3. Waste generation and use of natural resources.

Negligible impact on the GDP

• The implementation of an environmental tax in India will have three broad benefits: fiscal, environmental and poverty reduction.
• Environmental tax reforms can mobilize revenues to finance basic public services when raising revenue through other sources proves to be difficult or burdensome.
• Revenue from environmental tax reforms can also be used to reduce other distorting taxes such as fiscal dividend.
• Environmental tax reforms help internalize the externalities, and the said revenue can finance research and the development of new technologies.
• Environmental regulations may have significant costs on the private sector in the form of slow productivity growth and high cost of compliance, resulting 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.

Conclusion

• 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.

Guarantor beware

Why in News

• The Supreme Court judgment upholding creditors’ right to proceed against personal guarantors to loans provided by them to a corporate borrower helps lift the uncertainty in the financial market.

Background

• The financial system which is already under a mountain of bad loans, the recent judgement will help in expedite the resolution of such stressed assets.
• The two judge Bench was considering a clutch of petitions challenging the government’s 2019 notification that made personal guarantors a separate category of individuals who could be proceeded against under the Insolvency and Bankruptcy Code as part of the insolvency proceedings initiated by lenders against defaulting corporate entities.
• In dismissing the petitions, the judges made clear that the government was right in “carving out personal guarantors as a separate species of individuals”, given the “intimate connection between such individuals and corporate entities to whom they stood guarantee”.
• Banks now stand a real chance of recovering substantially more from the resolution of a stressed corporate entity.

Impact

• Several corporate leaders will be impacted. The promoters of many defaulting corporates, which are facing action under the IBC, had furnished guarantees for thousands of crores in loans availed by the companies they ran.
• The Court had also cleared that it is bound to strengthen the creditors’ positions in all ongoing, future and even completed insolvency proceedings.
• The approval of a resolution plan for the corporate debtor does not extinguish the personal guarantor’s liability, which “arises out of an independent contract”.
• Lenders can now proceed against the guarantors to enhance recovery given that most banks agree to ‘haircuts’ when negotiating a resolution plan with a new promoter for the defaulting company.
• Once the resolution plan becomes legally binding, the guarantor loses the recourse to remedy from the borrower when the creditor invokes the personal guarantee.

Conclusion

• Thus, Entrepreneurs will now have to think twice before signing a personal guarantee unless they can be very certain that the business, they found will not flounder.