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Budget's green initiatives
March, 05th 2010

It is notable that the Union Budget has a series of green initiatives designed to boost environment-friendly energy and emissions-free transport. The move makes perfect sense. Whats proposed is a gamut of tax incentives, higher outlays and a dedicated fund for clean energy.

Now, from a point of view of efficient taxation, it makes more sense to remove all tax exemptions and provide specific, well-scrutinised subsidy to those sectors that need special promotion. In a regime of generalised distortions, however, a few additional distortions in the form of tax breaks could prove helpful.

Given the bottlenecks in energy supply and widespread energy poverty, we need to proactively rationalise conventional energy usage, enhance energy efficiency and incentivise renewable energy. For solar power, whats proposed is a concessional Customs duty of 5% on machinery, instruments and appliances required for setting up photovoltaic and solar thermal generating units. On offer is excise duty exemption for their domestic manufacture.

The latter move may not be particularly tax efficient: the FM had to impose an excise duty of 4% on electric cars, as their manufacturers had had problems availing the duty credits on inputs, faced with nil duty on the finished good.

However, the move to exempt some critical parts or sub-assemblies of electric vehicles from basic Customs duty and special additional duty is in the right direction. Also welcome is the concessional excise duty of 4% for manufacture of solarpowered rickshaws, together with the exemption of key parts and components from Customs duty.

It is certainly worthwhile to reduce excise on production of LED lights, used in solar lamps, from 8% to 4%. But in tandem, whats required is to purposefully substitute subsidised kerosene oil (SKO), say, with solar lanterns. The rollout of rural power connections ought also be policy-coordinated to make large-scale SKO supply, costing the exchequer upwards of Rs 20,000 crore per annum, quite redundant. We do need holistic green initiatives.

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