The indirect tax system in India has undergone extensive reforms for more than two decades. Even after these reforms, it is still a highly fragmented and distortionary tax structure characterized by multiple tax rates, barriers to inter-state trade, and cascading of taxes. However, these reforms have succeeded in preparing the ground for the introduction of a comprehensive goods and services tax (GST). The GST has significant implications for the environmental management. In this paper, the authors argue that the environmental taxes should be integrated into the current design of GST. The authors discuss the following:
the role of eco-taxes for environmental management
examine the progress of indirect tax reforms in India culminating into the GST proposals
the three basic designs of GST currently being discussed and highlights the place of environmental taxes in these designs
analyses the international experience in this regard and the key lessons for India
The authors then outline a suitable design for integrating environmental taxes into the GST design. The Thirteenth Finance Commission has made reference to three forms of environmental taxes” Non-rebatable excise duties, cesses, and user charges. These three forms of environmental taxes can be used to serve different purposes. Non-rebatable excises add to overall GST level, and this should be used to at least partially reduce the core GST rate. Cesses should be earmarked for environment promoting activities in industries to cover cost of specific publicly provided environmental services were beneficiaries are identifiable.