GST Compensation Fund and Climate Change Policies in India


  1. Introduction

Climate change is one of the biggest threats to the globe in 21st century. The global community is continuously developing policies, laws and action plans to protect, mitigate and adapt to the impacts of climate change. The global community has also realised that climate policies can only be best achieved if nations have sufficient economic resources. However, utilisation, distribution, allocation and reach of these economic resources remain one of the biggest challenges globally.

Climate change is the biggest pressure that humanity has faced post-industrialisation, liberalisation and globalisation. The rise in the need for economic development has led torampant utilisation of natural resources and overexploitation of natural assets. This has caused extreme depletion of natural resources, including flora, fauna, rivers, mountains, etc. The depletion of such an extreme nature that the globe is living in the age of sixth extinction.[1]

After Stockholm Conference in 1972[2], the world realised that focus on economic development was depleting the natural capital of the earth. Such an imbalanced development that focuses on economic development exclusively will result in complete extinction and depletion of natural resources on earth.[3] Therefore, the concept of sustainable development was born so that the global development focused on the needs of the present generation without compromising the needs and ability of the future generation to development.[4]

However, the developing and least developed countries like India, Bhutan and Bangladesh assert the need of focusing on economic development more than protecting the natural resource or sustainable development. They also asserted that the nations and the citizens of these nations have an equal right to develop with the other nations.

Therefore, in the developing nations, financial and economic reforms have been at the heart of development, rather than sustainable development. However, since 2000, after the launch of Millennium Development Goals, Indian laws and policies have been derived from United Nation’s Agenda, thus focusing on sustainable development and environmental protection. These countries continue to assert that without economic resources, sustainable development and effective climate change mitigation and adaptation plans cannot be achieved.

Climate change is a science that calls for a combination of adaptation and mitigation policies in order to protect the nations from the impact of climate change. One of the foundational measures in pursuance to climate change policies is to reduce the dependency of nations on coal and oil by developing capacities in renewable and other clean energy sources. India also is moving in this direction by adopting and implementing such policies. However, renewable energy technology and transition is very expensive[5] and requires huge capital. In order to generate this capital, Indian Government launched National Clean Energy Fund in 2010 financial budget and has been making visible and concrete financial reforms with an objective to invest in clean energy in India. However, such financial reforms have been plagued by mainstream problems in India like corruption, embezzlement of funds, arbitrary and unreasonableness.

Recently, the introduction of the Goods and Services Tax reform or the GST reform as it is popularly called has led to diversion of funds from the National Clean Energy Fund to a new fund called the GST compensation fund. GST compensation fund aims to compensate the States for the losses they would incur due to the implementation of the GST regime.

This paper will begin with an analysis of pre-GST era and climate change policies in India, followed by post-GST era and climate change policies in India. This paper will further delve into analysing the rationale, importance and nexus between the GST compensation fund and implementation of climate change policies in India, while trying to answer the basic pertinent question i.e. will this new fund make climate change policies more effective in India? Also, how monitoring and transparency mechanism for use of this fund can be strengthened, consequently strengthening climate change laws and policies in India.

  1. GST reform and climate change funds in India

GST reform is historically the largest reform in India, introduced as the One Hundred and First Amendment Act, 2016 and known as Goods and Services Tax (Compensation to States) Act, 2017.[6] It is an Act that levies and collects tax on intra-State supply of goods and services by the Central Government.[7]

2.1. Pre-GST reform in India

India has been largely dependent upon the domestic funds for financing climate change policies and initiatives.[8] Since, 2010 India has also been experimenting with financial instruments and policies, particularly to enhance the climate change initiatives in India. Before GST reforms in India, there were two major funds that funded climate change policies in India, namely, National Clean Energy and Environment Fund and National Adaptation Fund.[9] Apart from these, other funds include Partial Risk Guarantee Fund for Energy Efficiency, Venture Capital Fund for Energy Efficiency.

National Clean Energy and Environment Fund reportedly generated more than INR 170 billion by levying coal cess since 2010.[10]  Union Budget, 2010-2011 introduced coal cess. This cess was also known as Clean Energy Cess as a de facto carbon tax levied under Section 83(3) of the Finance Act, 2010.[11] This cess is levied on coal and its varieities such as lignite and peat as specified under the Tenth Schedule of the Finance Act, 2010.[12] The objective of collection and flow of this cess into the National Clean Energy Fund (NCEF) as mentioned in the Union Budget of 2010-2011 was funding research and innovative projects in clean energy technologies. This fund lost its objective in transition and the scope of this fund was widened to include cleaning rivers and other environment protection sectors.[13] Pre-GST reforms this fund inter alia was used to clean rivers, especially to clean river Ganga.[14] The amount of funds collected as coal cess or Clean Energy Cess were enormous due to the amount of coal consumed in India to meet the energy production. The fund was started at a rate of INR 50/tonne in 2010 and increased to INR 400/metric tonne in Budget 2016-2017.[15] It was in the budget of 2014-2015 that Clean Energy Cess was proposed to have an expansive scope including financing and promoting clean environment initiatives and funding research in the area of clean environment.[16] This arbitrary change and expansion in the scope of National Clean Energy Fund, attracted corruption and other related embezzlement of funds. This not only attracted vague and arbitrary diversion of funds from National Clean Energy Fund to environmental issues like river cleaning. But, it also allowed the Government to take advantage of the gaps in the implementation of these funds.

The estimated proceeds from coal cess in India is predicted to be net INR 29,700 crore from coal cess in 2017-2018.[17] The proceeds, however, will now form the corpus of the GST Compensation Fund after the enforcement of GST Act, 2017.

2.2. Post-GST reform

Goods and Services Tax Compensation Fund is established under Section 10 of the Goods and Services Tax (Compensation to States) Act, 2017. This fund  comprises of proceeds of the cess levied under this Act[18] for supplies of good or services/intra-State supplies of such goods and services, in order to compensate for the loss of revenue to the States.[19] The States will suffer from a loss of Revenue after the enforcement of the GST Act, 2017. This compensation fund will operate for a period of five years or as recommended by the council under the GST Act.[20]

GST has emerged as predicted by many, as a big blow to the Clean Energy revolution in India.[21] It is because Clean Energy/Environment Cess has been abolished by Taxation Laws (Amendment) Act, 2017.[22] Coal supply will qualify as inter-State supply within the meaning of Section 8 of the GST Act, 2017.[23] Though the price of coal as a good depends upon the market forces, however, GST will be levied at Rs 400 per tonne.[24] GST Compensation Fund will also apply on rejects and ungraded coal.[25]

This compensation fund will derive its proceeds from the coal cess. Earlier these proceeds were used to fund clean energy projects and research on clean energy technologies. Post-GST reforms, the Revenues will be used for general development or compensatory measures by the State and Central Government. This compensation fund is a blow  to National Clean Energy/Environmental Fund and India’s international commitments to transition towards cleaner energy. However, these funds do not, in fact, seem to create an obstacle for development of clean energy sources in India. Recently, the Government of India are in the process of completing World’s Largest Renewable Energy Scheme by installing 75 GW solar energy capacity in India by 2022.[26] Also, India has increased 370% of solar capacity in last 3 years.[27]

Indian climate finance policies have been focused with a bona fide intention to fill the finance gap and boost climate change policies in India.

2.3. GST reforms have a direct impact on energy sector in India

Indian energy sector is largely dependent on coal and transmission lines that are on power grid, interconnecting and providing inter-State supplies, transmitting electricity from one location to another.[28] Electricity tarrifs are predicted to be raised approximately at the rate of 15 to 18% post-GST reforms.[29] Not because electricity is being taxed under the GST, it is because energy producing goods and services are being taxed. For instance, coal accounts of 57% of total primary energy use in India.[30] With coal cess quadrupled in India, the electricity prices are bound to rise as well. Even though electricity duty remains outside the scope of GST, State duties on electricity are very high and can range as high as 25-30%. National Electricity Policy was based on the vision of “electric power for all by 2012”. However, Indian electricity sector could not reach all homes in India and even where it has been successful to reach, access to adequate electricity remains a big question. Even with electricity access, the injustices with access to electricity prevails where regions and homes witness an electricity blackout for more than 12 hours at one length.[31]

In the wake of continuing confusion and double taxation on electricity by State and Central agencies, there are proponents who claim that post-GST reforms, the investment in clean energy sector will boost, enhancing India’s climate change policies and actions.[32] However, practices and projects like National Clean Energy/Environment Fund remain either underutilised, ill-utilised or fall prey to corruption and embezzlement of funds.[33]

  1. Nexus between GST Compensation Fund and Climate Change Policies in India

India accounts for 2.4% of the world surface area, but supports around 17.5% of the world population.[34] It houses the largest proportion of global poor (30%), around 24% of the global about 30% of the global population relying on solid biomass for cooking and 92 million without access to safe drinking water.[35] The average annual energy consumption in India in 2011 was only 0.6 tonnes of oil equivalent (TOE) per capita as compared to global average of 1.88 tonne per capita.[36] It is predicted by the World Energy Outlook that China becomes the world’s largest oil importer before 2020 and India the second largest oil importer around 2035.[37] Recognising the policy of “development without destruction”, India previously adopted various financial policies to fund its commitment to clean India. One of the major fund is now merged with GST Compensation Fund.

GST Compensation Fund will derive large chunk, approximately Rs 30,000 crore from carbon tax in India.[38] Carbon pricing is a widely accepted economic concept that remedies the negative external cost of generating carbon pollution.[39] There are two systemic approaches to carbon pricing. The carbon fee which is also called the carbon tax and the cap and trade system which is followed by the European Union Emission Trading Scheme (EU-ETS). Carbon tax—that is a tax on the carbon content of fossil fuels[40] (or on their carbon emissions) — could help to address both these problems.

Carbon tax is methodologically and ideologically beset way to stave off the worst impacts of climate change through some form of taxation on the carbon emissions through burning fossil fuels.[41] British Columbia in Canada has the “best practiced” carbon tax all around the globe, covering 70% of British Columbia’s total
greenhouse gas emissions.[42] Carbon tax in India cannot be compared to the one existing in British Columbia because carbon tax in India is no more a revenue neutral tax. A revenue neutral tax is one which operate with a clear objective of promoting clean use and choices by the consumers.[43]

In the Intended Nationally Determined Contribution (INDC) submitted by India to United Nations Framework Convention on Climate Change (Unfccc), it is evident that India claims to use carbon tax as first and most central financial instrument for climate change policies in India. The idea of carbon tax is attributed to Pigouvian theory of externalities, which internalises all externalities and deter acts which are regulated through tax.[44]

The basic idea of carbon tax in India pre-GST reform was to utilise the funds contained in the National Clean Energy Fund for clean energy and clean environment in India. With the onset of the GST regime,  this fundamental objective is lost in economic transition. The funds were aimed at bringing social and behavioural changes and make electricity more accessible to people. Now that India is in the process of generating huge renewable energy capacity, the fund generation from carbon taxes have lost importance.

Climate finance is also one of the major agendas of Paris Agreement[45] and Unfccc, because they recognise the need and importance of finances to promote balanced economic development with environmental protection, in short, to achieve sustainable development.

  1. Recommendations

 Post-GST reforms, it would be impossible to recommend India to base it’s climate finance policy on the model of British Columbia model, where the only objective of carbon tax is to give back cleaner and greener choice to the consumers. It is one of the best practices in the globe, because the carbon tax is used to bring behavioural changes amongst the citizens. Therefore, if the Government of India decides to follow a completely revenue neutral carbon tax, based on Pigouvian theory, then India can think of behavioural changes in the people.

Moreover, apart from this, I would also like to recommend that GST Compensation Fund can have a separate accounting which should also be available in the public domain, where collective, use, dissemination of funds should be a public information. Such a practice can be historically traced to Bhopal gas tragedy, however, funds from Bhopal gas tragedy stand equally ill-utilised and ill-reported with low income and uneducated families suffering the most.

India has digitalised major economic platforms in India. With an increase in the use of technology, India should move forward in the direction of developing strong monitoring and transparency mechanism which should be based on information sharing and information dissemination. Information as a tool for financial management can prove to be one of the best practices in the world. It is also because with the passage of time, carbon tax will only increase. In 2012 Australia introduced a carbon tax of 23 Australian Dollar per ton of carbon, in European Union the carbon tax varies from €4 to €30 per tonne of CO2, in British Columbia the tax rates on 1-7-2012 are based on $30 per tonne of CO2 equivalent emissions, increasing by $5 per tonne from $25 per tonne imposed since July 2011.

With so much of finance flowing in the system, we need better monitoring and transparency for utilisation. Regardless, the climate change policies in India do not suffer a set back due to reasons of corruption, mismanagement of funds, embezzlement of funds or fraud. Even though, the abovementioned problems exist with financial management in India, it has emerged as the leader in climate change and energy policies in the world. This will continue, particularly in the energy sector, however, the water and other natural resources need quality investment for quality improvement.

Bhumesh Verma is Managing Partner at Corp Comm Legal and can be contacted at bhumeshverma@corpcommlegal.com and Chhaya Bhardwaj is Assistant Professor, Lloyd Law College.

[1] Nadia Drake, Will Humans Survive the Sixth Great Extinction? National Geographic, 23-6-2015.

[2] UN General Assembly, United Nations Conference on the Human Environment, 15-12-1972, A/RES/2994, available at <http://www.refworld.org/docid/3b00f1c840.html> (accessed 10-10-2017).

[3] Drake, (n 1).

[4] UN General Assembly, (n 2).

[5] Greenpeace, Renewable Energy Myths available at <http://www.greenpeace.org/international/en/campaigns/climate-change/energyrevolution/renewable-energy-myths/> .

[6] The Goods and Services Tax (Compensation to States) Act, 2017 available at <http://gstcouncil.gov.in/sites/default/files/GST%20(Compensation%20to%20States)%20Law.pdf>.

[7] Ibid.

[8] India’s Intended Nationally Determined Contribution: Working Towards Climate Justice available at <http://www4.unfccc.int/submissions/INDC/Published%20Documents/India/1/INDIA%20INDC%20TO%20UNFCCC.pdf>.

[9] Ibid.

[10] Ibid.

[11] Union Budget 2010-2011, Key Features of Budget 2010-2011 available at <http://indiabudget.nic.in/ub2010-11/bh/bh1.pdf>.

[12] Notification No. 01/2010-Clean Energy Cess available at <https://www.coal.nic.in/sites/upload_files/coal/files/curentnotices/cbec140710_0_0.pdf>.

[13] Smiti, India Doubles Tax On Coal to Fund Clean Energy, Environmental Projects, 20-7-2014 <https://cleantechnica.com/2014/07/20/india-doubles-tax-coal-fund-clean-energy-environmental-projects/>.

[14] Vikram S. Mehta, A story of the clean energy fund, The Indian Express, 2-8-2014 available at <http://indianexpress.com/article/india/india-others/a-story-of-the-clean-energy-fund/>.

[15] Armin Rosencranz and Nitish Raj, Clean energy in a “new” India, 11-4-2017 available at <http://www.thestatesman.com/opinion/clean-energy-in-a-new-india-1491945813.html>.

[16] Clean Energy Cess-Carbon Tax of India, Indian Economic Service available at  <http://www.arthapedia.in/index.php?title=Clean_Energy_Cess_-_Carbon_Tax_of_India>.

[17] Sarita C. Singh, Government expects to net Rs 29,700 crore from coal cess in 2017-2018, ET Energy World, 2-2-2017 available at <http://energy.economictimes.indiatimes.com/news/coal/government-expects-to-net-rs-29700-crore-from-coal-cess-in-2017-18/56938705>.

[18] Clean Energy, (n 16).

[19] Act, 2017, (n 6).

[20] Ibid.

[21] M. Ramesh, GST, a big blow to clean energy financing, 12-4-2017 available at <http://www.thehindubusinessline.com/economy/gst-a-big-blow-to-clean-energy-financing/article9634391.ece>.

[22] Taxation Laws Amendment Act, 2017 (Communicated vide press release dated 7-6-2017).

[23] Act, 2017, (n 6).

[24] Goods and Services Tax (GST) E-Book, Coal India available at <http://nclcil.in/finance/gst/GST%20FAQ.pdf >.

[25] Ibid.

[26] Ministry of New And Renewable Energy, Government of India available at <http://www.mnre.gov.in>.

[27] Ibid.

[28] Abhishek Jain, GST’s impact on the power sector, Ernest & young Reporting Insights magazine, July 2017 available at <http://www.ey.com/Publication/vwLUAssets/ey-gst-impact/$File/ey-gst-impact.pdf>.

[29] Ibid.

[30] BP Statistical Review of World Energy, June 2017 available at <https://www.bp.com/content/dam/bp/en/corporate/pdf/energy-economics/statistical-review-2017/bp-statistical-review-of-world-energy-2017-full-report.pdf>.

[31] India Aims to Electrify All Households by End of 2018, Yale Environment 350, E360 Digest, 26-9-2017 available at <http://e360.yale.edu/digest/india-aims-to-electrify-all-households-by-end-of-2018>.

[32] Srinivas Raman in Environment, India Has A History of Flawed Climate Change Policies. Here’s Why, 31-8-2017 available at <https://www.youthkiawaaz.com/2017/08/climate-finance-in-india-a-case-of-policy-paralysis/>.

[33] Ibid.

[34] India’s Intended, (n 8).

[35] Ibid.

[36] Ibid.

[37] World Energy Outlook 2015, Factsheet, Global Energy Trends to 2040 available at <http://www.iea.org/media/news/2015/press/151110_WEO_Factsheet_GlobalEnergyTrends.pdf>.

[38] Singh, (n 17).

[39] S. Eskeland & Shantayanan Devarajan, World Bank, Taxing Bads by Taxing Goods: Pollution Control with Presumptive Charges 9 (1996) (“For cars … it is important both to make trips cleaner and to discourage trips – instruments that do both are necessary unless taxes can be levied on individual emissions.”). Article: Triple-Dividends: Toward Pigovian Gasoline Taxation, 30 J. Land Resources & Envtl. L. 145.

[40] Putting a Price on Carbon with a Tax, World Bank available at <https://www.worldbank.org/content/dam/Worldbank/document/SDN/background-note_carbon-tax.pdf>.

[41] Barry G. Rabe, The Political Viability of Carbon Taxation, BROOKINGS INST. (5-12-2012, 12:00 a.m.), available at <http://www.brookings.edu/blogs/up-front/posts/2012/12/05-carbon-tax -rabe>.

[42] British Columbia’s Revenue Neutral Carbon Tax available at  <http://www2.gov.bc.ca/gov/content/environment/climate-change/planning-and-action/carbon-tax>.

[43] James M. Buchanan & Wm. Craig Stubblebine, Externality, 29 Economica 371 (1962).

[44] A.C. Pigou, The Economics of Welfare (4th Edn. 1952).

[45] United Nations/Framework Convention on Climate Change (2015) Adoption of the Paris Agreement, 21st Conference of the Parties, Paris: United Nations.

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