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| Taxing energy | | The time has come to rationalise energy taxes |
| Business Standard / New Delhi Jun 08, 2009, 00:44 IST |
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It has been reported that the finance ministry has raised objections to the income tax exemptions provided to the producers of natural gas. Although the ministry of petroleum and natural gas advocates the equal treatment of oil and gas as a logical way to incentivise bids under the most recent round of the New Exploration Licensing Policy (NELP), the position taken by the finance ministry is that the policy only extends to the exemption to oil. Given this, it is hardly surprising that there was very little interest in the new NELP round of bidding. On both commercial and analytical considerations, the finance ministry’s position is untenable.
From the commercial perspective, an exploration programme is fraught with risks, with the driller not certain that he will find any exploitable resources, let alone being able to predict whether it will be oil or gas. If the objective is to induce him to explore, then he must be provided tax incentives regardless of what he finds. Conversely, if he doesn’t find anything, he absorbs the losses entirely. The ministry’s argument that this will involve substantial revenue losses is untenable in the face of the absence of interest in the bidding. If there is no exploration, there will be no revenues anyway.
Beyond this, however, lies the deeper question of the optimal taxation of energy. Tax treatment of energy sources is ideally based on two considerations. Given that a calorie is a calorie, regardless of where it comes from, tax incidence across alternative fuels must be based on the principle of calorific equivalence in order to remain neutral across fuels. In other words, the tax collected per calorie must be the same, regardless of the source.
However, given that energy use is polluting, the use of more polluting fuels can be disincentivised by levying a tax proportional to the quantum of pollution per calorie. India’s energy tax system is, of course, far away from this benchmark, largely because coal, which is amongst the most polluting fuels per calorie, is the major domestic source of commercial energy. But that should not come in the way of exploiting every opportunity to move closer to the ideal. Natural gas offers a significant opportunity to reduce emissions per calorie of energy use and, by that token, people who produce and use it must be provided with every incentive. Previous finds from Bangladesh and all the way down the country’s east coast suggest a greater presence of gas than of oil. If this is indeed the case, from the perspective of both self-reliance and environment friendliness, it makes a lot of sense to provide incentives to people to come into the business of finding it and pumping it out. Notional revenue losses resulting from an exemption simply cannot be used as an excuse. Over the long haul, even if coal remains entrenched as the largest energy provider, switching over to gas as much as possible must be the primary goal of our energy policy. Sensible tax policy is certainly an important contributor to this.
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