Sunday, June 13, 2010

Law Street - Economic Times (June 2010) -Towards a greener world

Dear Readers,

We celebrated environment week, this month. But, are we ready to turn towards the more expensive green products? Appears not! It is time the government subsidized the purchas of these products through tax credits, as have several other countries. Looking forward to a greener world. Read this column online in The Economic Times, by clicking here.

As always, the column is also cut and pasted below.

Have a nice weekend.


Towards a greener cleaner world
• Tax sops must be at the consumer level
• Tax carrots rather than sticks will work
• Monetary sops will be an added advantage
We celebrated Environment Week this month. Various organizations as part of their Corporate Social Responsibility (CSR) initiatives got their act together, conducted workshops to sensitize their employees, planted trees, et al. A few friends participated in “cycle to work” initiatives which were understandably short lived.
Short spurts of efforts, while they do contribute in a way, are not adequate to save the planet. We need long term efforts which provide lasting results and it is here that the government can really help. Zenobia Aunty has been reading a lot about green investments. She says: “A recent international survey undertaken by Regus states that: Governments worldwide must introduce new tax breaks to increase the uptake of green investment.”

Eco-friendly measures seem attractive on paper, but they do entail a higher cost, at least initially. No wonder then that 46% of companies surveyed have declared that they will only invest in low-carbon equipment if the running costs are the same or lower than those of conventional equipment. A mere 40% have invested in low-carbon equipment and only 38% have a company policy to do so.

Governments world over have down the years, devised various forms of green taxes to save the environment. Such taxes have been as varied as a ‘plastic tax’ on use of plastic bags in Ireland, to a ‘flight tax’ in the UK which airlines had to cough up if they did not fly at full capacity.

While Zenobia Aunty was in Bangalore (Bengaluru) there were talks of permitting cars with odd numbered license plates to drive on one day and those with even numbers on another day. Would this have helped in reducing carbon emission? “Not really, with an inefficient public transport mechanism, families were really thinking of buying yet another car, as car pooling was not always an option,” explains Zenobia Aunty.
If spreading the tax net wide, pays dividends, so does spreading of tax sops. Perhaps, it would make better sense to provide sops for green investments at the consumer level. It would help spread the movement make the world greener.
United States for instance, with its green tax sops covers the consumers. Tax credits as distinct from tax deductions are available for purchase of hybrid cars or battery, electrical or alternate fuel vehicles; heating and air conditioning systems that are ‘energy star rated’; renewable energy systems; solar and wind energy systems and even something as simple as insulation such as new doors, windows or roofing that meet set criteria and help save on electricity bills.

How is a tax credit different from a tax deduction? A tax credit is a ‘rupee-for-rupee’ reduction in your total tax bill. For instance, your tax bill works out to Rs. 2.50 lakh. Let us assume that a tax provision states that for each solar panel that you install in your house you get a deduction of 20% of the purchase price subject to a cap of Rs. 50,000 per solar panel. Assuming you purchase three solar panels and can claim Rs. 1.5 lakh through such purchase. Your tax bill will then be just Rs. One lakh.

On the other hand, a tax deduction is expenditure or a prescribed amount (such as depreciation) which is allowed as a deduction from your total income to arrive at the net taxable income, which is then subject to tax at the applicable rate. While both reduce your tax bill, in pure monetary terms a tax credit is more beneficial.
It is the consumer who can propel a demand for environmental friendly products. With prices for such products being higher, tax sops alone can provide the much needed spending boost in the right direction.

In India we have seen a few sporadic attempts such as wind farms being eligible for 100 per cent depreciation or higher depreciation rates for pollution control equipment. However, till date attempts have not been made to start at the consumer level.

Imagine the potential that we have to use solar energy, especially in the rural areas of India, which are prone to power cuts, or for that matter, even small scale industries in urban areas. To boost demand for use of solar energy, start at the consumer level, enabling him to get a tax credit. This would mean that the manufacturer of solar panels does not have to face hardships to convert people towards a more friendly power source and can make fair profits. After all, even a green manufacturer needs to survive. Moreover, provision of softer loans for purchase of green products by households, farmers, small scale enterprises and certain other segments would be an added advantage.

It is true that the government is considering abolition of tax holidays, however, tax credits to the individual for purchase of green products, is something which needs to be seriously contemplated. Drat, the power just went off, now where is that candle?

Source of the photograph.

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