Raising revenue has always been a challenge for a government. It is hard to raise direct tax rates, as it is said to come in the way of spending power. Besides, the government has been lowering income and corporate tax rates over the last decade or so. As for indirect taxes, the GST is outside the ambit of the Budget, but rates were separately lowered by the Council last September. Any talk of increasing taxes on goods and services can lead to inflation fears. At the same time industry, economists, market experts want more spending on infrastructure. Can one think of a different way of partly funding infrastructure through a separate tax?
This is where a new system of taxation can be introduced based on the principle of ‘multiple of 10’ where this number is applied as a special charge on various goods and services in infra space. It has been seen that an increase in cost has seldom been a limiting factor for use of services such as travel or even telecom services. The same holds for purchase of vehicles. Similarly, goods have to be transported irrespective of the cost involved as this can be partly passed on to the user. There can however be a price impact which can be examined separately.
It is, therefore, possible to design a cess or surcharge on goods and services associated with infrastructure that is not a burden on the user, but at the same time yield considerable revenue to the government, given the large number of users. The Table gives the potential revenue that can be garnered by just imposing this charge which can be called a tax, cess or surcharge on certain infra-related goods (vehicles used as a proxy for roads) and services based on volumes observed in FY25 or FY26 for them.
Price inelastic
In all these cases the demand for the service/product would be unaffected as it is price inelastic given the increase being contemplated. At the lowest level, the ₹1,000 tax for a two-wheeler costing ₹75,000 will be just 1.3 per cent and will fall as the entry price level goes up. In fact, the ₹1,000 suggested can be the average charged with the tax being higher for passenger vehicles and lower for two-wheelers depending on engine capacity. Therefore, the number indicated in the Table is an average. In the case of vehicles, typically a purchase is made once in 4-5 years, and hence is not onerous for a consumer.
For mobile connections, the annual ARPU (average revenue per user) would work out to ₹2,100. A tax of ₹10 per year will be an increase of less than half per cent and will not be noticed. The railways earns its revenue on freight and passenger traffic. For freight the average revenue works out to roughly ₹1,105/tonne and hence the ₹10 per tonne suggested will be insignificant.
The inelastic nature of demand in the case of both railways and airlines is evident. The railways has introduced dynamic pricing, and yet, the traffic has not eased.
An average rail ticket costs ₹265 (considering passengers ferried and revenue from passenger traffic).
The ₹10 per ticket charge would be 3.8 per cent but can again be graded on a scale where it can be ₹1 at the lowest level of class and distance which can increase to ₹100 for higher class travel. For airline passengers, the oligopolistic power exercised by the airlines in increasing the ticket rates has not dampened movement. On an average a ticket cost was ₹7,500 in FY25 and hence a ₹100 tax will mean an increase of just 1.3 per cent.
Weights in CPI
The broad weights of these components in the CPI are interesting. It is highest at 1.86 per cent for mobile bills, but comes down to less than 1 per cent for others. For two-wheelers it is 0.79 per cent while for cars it is lower at 0.48 per cent. Rail fare has a weight of 0.18 per cent in the index while it falls to 0.077 for air fare. Freight charges for railways and ports would not be directly involved in the CPI and would come indirectly in the WPI for products which use these services for transportation.
There is hence scope for levying taxation as a user charge to garner revenue. Once tax rates start stabilising, the taxable base, in other words, nominal GDP, needs to increase to generate funds. FY26 has been unusual in terms of inflation being very low, which has caused nominal GDP to be lower than expected. This is part of the business cycle.
In such situations, it is necessary for the government to explore other revenue-raising options. The proposed charge/tax suggested here can generate around ₹20,000 crore without really affecting consumption of the good or service. The inflationary impact will be minimal. Once introduced, these charges can be periodically revised to stabilise the revenue flows.
Link: https://www.thehindubusinessline.com/opinion/merits-of-user-tax-on-infra-services/article70534747.ece/amp/
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