ISSN: 1391 - 0531
Sunday November 18, 2007
Vol. 42 - No 25
Financial Times  

Environmental conservation levy: Does it make any sense?

By D.N.R Samaranayaka, Economist

The 2008 budget proposals introduced a new levy called the “Environment Conservation Levy” and its application according to the proposals, refer “to individuals, businesses or items considered as harmful to the environment”. Although the action of an individual could be harmful to the environment such as illegal felling of trees in protected forests, it is not clear, however, how an individual could be harmful to the environment.

The criteria adopted by the Ministry states that “a permanent household, with a vehicle and a telephone and electricity” will be liable to this levy. At the outset, what is meant by a permanent household needs clarification since a household is usually referred to a group of people who lives together in one house. The clarification is needed since there is no permanency in the case of households because the number of people who live together can vary from time to time due to various reasons, including deaths, immigration to other countries, migration to other areas for work or to settle down after marriage.

Despite the lack of clarity of the definition of the household, it is assumed that a household who is liable to the levy should own a house, a vehicle, a telephone and have electricity supply. All four requirements are needed for a household to be liable for the proposed levy. The Ministry of Environment expects Rs 1,000 million from this source annually from 2008. The question is whether the expected revenue can actually be collected from this source. It is quite clear that the Ministry does not know how many households will fall into this category or that this information is not readily available from any single source.

With Rs 20 per month or Rs 240 per year, there should be 4.2 million households who are liable for this levy to bring the expected revenue of Rs 1,000 million per year. The estimate of total households in the country in 2006 was only 4.1 million, including 1.9 million Samurdhi recipients. Certainly, the Samurdhi recipients do not fall within the category of households who are liable for the levy. Even if the entire non-Samurdhi households, numbering 2.2 million, are required to pay the levy the total amount that can be collected would not exceed Rs 520 million.

The ownership of a vehicle and a house further limits the number of households liable to the levy. Although nearly 1.6 million vehicles are registered with the Department of Motor Traffic, when the owners of multiple vehicles and vehicles owned by the Government and other State institutions are excluded, the number of vehicle owners would be less than 1.3 million including Three Wheelers and Motor Cycles which account for 60% of the total vehicle population. Even if all these households own houses, have electricity and own a telephone, the amount that can be collected is around Rs 300 million. If the Three Wheelers and Motor Cycles are excluded from this levy, then the potential revenue from this source drops to around Rs 118 million. Furthermore, the ownership of a vehicle can change frequently. In some cases the house is owned by the head of the household but he or she may not own a motor vehicle which is in the possession of another family member in the household. It is not clear about the liability of this family for the proposed levy.

In any case, the proposed levy cannot bring any significant amount to the Treasury, even if the entire business community decides to pay the levy. This means that the 2008 Budget has over estimated the revenue potential from this source. The cost of implementation of this levy, on the other hand, could be several times the amount collected from the levy since the implementation involves developing a data base with the household characteristics as defined by the Ministry, setting up of institutional arrangements and establishing infrastructure facilities to support the implementation process. This cost appears to be left out in the budget estimate. The ultimate result of this is to add another unproductive expenditure to the already over burden economy. It is possible that the amount collected will be much less than the cost of implementation of the levy.

Although the government expects the head of the household to register with the Ministry or any other institution created by the Ministry for this purpose, the Ministry should know how many households are eligible for this levy if it is to be effectively implemented. Without any mechanism to verify how many are liable for the levy, there will be very high tax evasion since tax is the last thing that people will pay voluntarily.

The most crucial point is the basis of the selection of the households who are liable to the levy. It appears that the Ministry believes that the households who are required to pay this levy are the people who are responsible for environmental pollution such as forest clearance, illegal felling of valuable timber from state forests, unauthorized sand mining in protected sites, indiscriminate garbage dumping in prohibited and environmentally sensitive areas and emission of gas and smoke from vehicles.

It is, therefore, important that the government explains the basis that this levy was introduced to a selected group of people excluding more than 50% of the households in the country. Unless the Government can prove that these people are the culprits, the proposed levy could be discriminative and that these groups can claim that their human rights have been violated by the government under the proposed levy.

It is also important to point out that this levy is conceptually linked to the user pay principle since it selects a specific group to collect the levy. A levy introduced under the user pay principle is usually applied to households who either benefit from an investment or are responsible for environmental pollution. The key point is that the levy based on user pay principle is applied when the beneficiaries or polluters can be specifically identified. A ‘road toll’, for example, is collected by a number of countries, including India, when vehicles travel on expressways and highways. These roads provide benefits in the form of saving on vehicle operating costs and travel time and therefore the levy is justified. Non users of these roads are not liable to this levy. Similarly, if an industry pollutes a water body by discharging polluted materials, a levy could be imposed to that industry, but other industries are not liable for this levy. The economic theory advocates that the purpose of a pollution levy is to correct the social costs incurred by the society due to the actions of those responsible for environment pollution. Accordingly, it cannot be a levy applicable to an arbitrarily selected group of people.

There is also no clear statement in the proposals as to how this levy is to be utilised for conservation of the environment or what aspects of the environment that will benefit from the collection of the levy. It is also not known whether the Ministry has designed an environment conservation plan and if so it should be made public in order to measure progress following the introduction of the new levy.

Introducing a new tax alone makes no difference to the existing environment problems unless effective measures are planned and implemented. In the absence of a clear conservation policy what is collected is likely to be spent on activities completely unrelated to conservation of the environment. Given the lack of transparency in government activities and spending programs, it is quite possible that this collection will be utilized for funding the expenses incurred by politicians, as revealed by the media in the case of settling a mobile phone bill of the wife of a Minister.

The Ministry appears to be only interested in the minor issues affecting the environment, leaving the major issues unattended. Illegal felling of timber and unauthorized sand mining are major issues with significant economic and environmental implication, but so far nothing has been done to prevent these activities and protect the natural environment.

To begin with the existing legal system needs strengthening since the current laws are not effective enough to discourage these activities. According to a recent statement by a senior Minister in the Cabinet, at least two ministers are involved in illegal felling of timber. Although he promised to bring this matter to the attention of the President, the people are unaware as to whether the president has taken any action on this matter.

Finally, it is quite clear that the proposed levy is based on vague ideas without any solid foundation or understanding about the administrative difficulties of implementation.


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