Calcutta Notebook


The tax exemption package to promote industrialization in the hill states of Uttarakhand and Himachal Pradesh has been extended by four years. Industries being set up in these states would be entitled to tax reliefs in respect of income tax and excise duties. The difficult terrain of these states presents an inherent disadvantage for setting up industries. The cost of production here is higher than in the plains. Idea is that the tax exemptions will compensate for the high cost of production and help in industrialization of these states. Problem, however, is that such packages also become a trigger for destruction of environment. These State Governments are pushing to harness every inch of their river flows for generation of electricity. They want to provide an additional attraction to the industries by providing cheap electricity. This will cause a huge environmental damage to aquatic biodiversity, water quality, carbon emissions, etc. The challenge is to find a way to compensate the hill states for their difficult terrain while protecting the environment. One way out would be to provide Green Bonus instead of tax exemptions.

Industries and vehicles in the plains emit carbon dioxide into the atmosphere. This leads to skin and respiratory diseases. It also leads to higher temperatures and more expenditures on fans and air-conditioners. This carbon is absorbed by the forests in the hill states and the quality of air improves all around. People in the plains are saved from the ill-effects of the carbon emissions made by them. The hill states incur a cost, however. They are not able to cut the forests and sell the timber. Similarly industries and municipalities in the plains dump sewage into the rivers. This leads to loss of fishing and also the people are deprived of the pleasure of taking a dip in the river. The capacity of the river to bear this pollution is enhanced by free flow of the river in the hills. The river water absorbs beneficent metals like chromium and copper which have bactericidal qualities and help the river fight pollution. People in the plains save monies in treatment of sewage and also enjoy the dip in the river. The hill states, however, again incur a cost. They are not able to make hydropower projects. Hill states forego the revenues from hydropower to make available good quality water to the people living in the plains. The hill states are losing out in order to provide benefits to the plains. Obvious solution is for the plains to pay compensation to the hill states. Savings to the people in the plains should be shared with the hill states. Then the sacrifice by the hill states will become win-win situation for all concerned.

Officers of the Planning Commission have endorsed this approach. A Working Paper written by its two Directors has argued that cross-support across states for the afforestation programme should be explored. States like Uttar Pradesh and Bihar are beneficiaries of afforestation done by Uttarakhand. The latter bears the costs. Therefore it was suggested that tradable permits could be created. Forest-surplus states could sell the permits to highest bidder among the forest-deficient states. The Supreme Court had also asked the Government to institute such a mechanism about a decade ago. However, this was resisted by the polluting states. Instead a mechanism has been evolved to provide grants under the Finance Commission formulas. The allocation to the states also takes into account the Environment Index though this is only 2 percent of the total. Green states get higher share in the revenues.

A word of caution is needed here. Green Bonus must be linked to verifiable targets otherwise this will not be successful in arresting deforestation and killing of rivers though. A report of Yale University notes, "Since 2000, foreign donors, working with the Brazilian government, have spent hundreds of millions of dollars to place 386,000 square miles of the Amazon—an area nearly as large as France and Spain combined—in protected areas. Yet during that same period, logging, farming, ranching, and development in the Amazon have destroyed a forest area half the size of Norway." Reason is that payment is linked to the area of the forests; and not to change in the same.

Say Himachal today is provided Green Bonus. Yet it may be profitable for Himachal to cut the forests because the benefits from cutting may exceed the receipts from Green Bonus. Green Bonus is like interest received on a Fixed Deposit while selling timber is like encashing the Fixed deposit itself. It is profitable for a person to encash the Fixed Deposit if he is not likely to be around to receive the interest. Thus Green Bonus must be designed in a way that makes it profitable for the hill states to actually conserve the forests and rivers.

The hill states should be given Green Bonus instead of tax exemptions. But this should be tied to the improvement in the status of forests and rivers. Tax exemptions are wholly harmful because they provide an incentive to destroy the environment. More-over, the efficacy of tax exemptions is questionable. It is seen that industries flee after the tax exemptions come to an end.

Vol. 46, No. 32, Feb 16 - 22, 2014