APRIL 21, 2015

By TIOL Edit Team

INTERNATIONAL Monetary Fund (IMF) has rightly pitched before its member countries the rare opportunity to undertake energy tax reforms against the backdrop of subdued global prices.

IMF has also wisely mooted country-specific as well as category-specific (oil exporters, for instance) tax reforms to improve global economic prospects and to manage risks.

NDA Government should pay heed to IMF's advice. It should seize the decline in global prices of petroleum and other commodities as an opportunity to revive comprehensive energy taxation reforms. They were proposed in the virtually forgotten Integrated Energy Policy (IEP), which was approved by the UPA Cabinet in December 2008.

Before elaborating on energy tax reforms in the country, it would be apt to note what IMF has stated. It has expounded its reforms ideas in three reports released during mid-April 2015. These are: Fiscal Monitor, World Economic Outlook (WEO) and Global Financial Stability report (GFSR). A common feature of three reports is reforms in energy subsidies and taxes.

As put by Fiscal Monitor, "Fiscal reforms will be essential to catalyze growth. Lower oil prices provide a golden opportunity to reduce inefficient energy subsidies in favor of more productive and equitable spending. Energy tax reform could help reduce negative externalities caused by energy consumption, such as pollution and global warming, and provide breathing room for growth-enhancing tax reforms-for example, by lowering taxes on labor to boost employment."

WEO agrees: "There is a broad need for structural reforms in many economies, advanced and emerging market alike. In this regard, lower oil prices also offer an opportunity to reform energy subsidies and taxes in many oil exporters and importers."

Fiscal Monitor says: "Finance ministries have a critical role to play not only in championing and administering carbon taxes and broader energy price reforms, but also in ensuring that revenues are put to good use."

NDA Government has so far given mixed and disjointed signals on energy subsidy and tax reforms. It, for instance, has restored market pricing of both petrol and diesel. With this, only two refinery products, LPG and Kerosene, now remain under the subsidy regime.

It has also increased the indirect taxes on these transportation fuels and clean energy cess on coal to mobilize resources for economic growth and to discourage energy wastages. It has tried to contain LPG subsidy through cash transfer of subsidy to LPG buyer's bank account.

The Government has, however, made energy subsidy and administered pricing regime more complex by providing for pooling (cross-subsidization) of costlier imported gas (RLNG) with cheaper domestic natural gas. It has created two separate gas pooling arrangements for power and urea plants.

Instead of this cross-subsidization approach, the Government should opted for phased market-pricing of domestic gas to take advantage of declining spot prices of imported gas (RLNG). The resulting reduction in price differential would have led to increase in the consumption of imported gas during the interregnum. It would have also served as a stimulus for companies to ramp up exploration and production of indigenous gas.

The real challenge before the Modi Government lies in convincing the States to include hydrocarbons including natural gas in the proposed goods and service tax (GST) right from the word go.

The challenge lies in providing uniform and minimum GST rate for all forms of primary energy to enable consumers to make rational choices in energy usage. Similarly, secondary energy such as electricity should be subject to a uniform GST.

It is here pertinent to recall tax-centric features of IEP. It says: "Taxes should be neutral across energy sources except where differentials in taxation across energy sources are specifically intended to counter differential externalities, such as those reflecting environmental externalities."

The Expert Committee on IEP, in its report submitted in August 2006, stated: "Central and State taxes on commercial energy supplies need to be rationalised to yield optimal fuel choices and investment decisions. Relative prices of fuels can be distorted if taxes and subsidies are not equivalent across fuels. This equivalence should be in effective calorie terms. In other words they should be such that producer and consumer choices as to which fuel and which technology to use are not affected by the taxes and subsidies. Socio-economic benefits such as employment generation and positive impact on energy security may support differential taxes on alternate fuels."

It added: "Consistent Tax Structure Relative prices can be affected by taxes and subsidies. Excise and import duties have to be consistent across different fuels. For an optimal allocation of resources, taxes on capital goods that use different fuels to produce the same output should be consistent."

With subdued global petroleum prices expected to continue into 2016, time is opportune for the Government to roll-out a roadmap for implementation of IEP.

UPA had set up a monitoring Committee under the Cabinet Secretary to oversee implementation of IEP. NDA should disclose whether this committee exists. In any case, it should issue a status paper on the implementation of different provisions of IEP.

An energy-neutral IEP and inclusion of all imposts on all forms of energy under GST are crucial for improving the productivity across all sectors. The twin initiatives can give powerful boost to ‘Make in India' campaign.

As put by GFSR, "Policymakers should support further economic risk taking, such as tax reforms that could encourage firms to build capacity and increase employment."