A Study of Feasibility of Replacement of Individual Income Tax by Carbon Tax

Abstract

Acarbon tax can be central pillar of tax reform and sound fiscal policy. In India, still no tax is charged on the emission of carbon dioxide. Carbon tax could be used to replace individual tax and tax simplification and less government regulation. A carbon tax is also cheaper and often more efficient way to reduce carbon emission than subsidies for alternative fuels. The main objective of the present research paper is to examine the feasibility of replacement of individual income tax by carbon tax.

Under the present paper null hypothesis i.e. there is no difference between tax collection from individuals and carbon tax, is accepted. It clear indicates that the difference between income tax collected from individuals and carbon tax collected from polluters is not significant. By imposing carbon tax instead of individual income tax, the revenue of government will not be affected and approximately 3.5 crores taxpayers shall be benefitted.

Although our research shows that whole individual income tax can be replaced by carbon tax yet it is not possible than alternatively all the taxpayers having taxable income less than five lakhs shall be exempted from personal income tax i.e. minimum exemption limit can be increased from 200000 to 500000. Approximately 2.84 crore tax payers whose income is less than five lakhs shall be benefited. They contributed only 10.10% of total personal income tax collected. Such revenue loss can be compensated by imposing carbon tax on polluters. Due to this relief the government will lose only approximately 20% of total tax revenue collected. Such losses can be set off through imposing carbon tax on most polluted industrial units.