[Opinion] Evaluating the Role of Green Taxes in India’s Environmental Policy

Aranya Chatterjee & Arin Chatterjee – [2025] 180 taxmann.com 668 (Article)

1. Introduction

Climate change is a serious global issue and it needs quick and long-term policy solutions. In this situation, fiscal measures have become the main option for preserving the environment. One of these measures, green taxation, has been referred to as an all-purpose device that not only raises money but also encourages the lowering of environmental damage. The Organisation for Economic Co-operation and Development (OECD) has classified environmental taxes as taxes that are imposed on goods or activities that do harm to nature, thus making the polluters pay for the damage done. In India, the process of gradually incorporating green taxes into the tax policy has been substantial. The launch of the Clean Energy Cess in 2010, which was later called Clean Environment Cess, was a crucial move to bring fiscal policy and environmental goals together. The tax on coal production, which was the tax’s main target, was meant to cut down on carbon emissions and to finance renewable energy projects.

2. Conceptual Framework – Understanding Green Taxation

2.1 Definition and Purpose

• Environmental taxes or “green taxes,” as they are popularly called, are taxes that are charged on products or activities that have a negative impact on the environment. The Organisation for Economic Co-operation and Development (OECD) states that the purpose of these taxes is to make the polluters pay for their pollution and to use the money raised from the taxes to fund projects that help restore the environment. These taxes can be applied in different areas like energy products, motor vehicles, emissions, waste management, and natural resource usage.
• In India, green taxes have been instituted primarily to tackle the environmental crisis, and simultaneously, they are a source of revenue for sustainable development. The Clean Energy Cess, which was later renamed the Clean Environment Cess, was one such tax that was charged on coal mining with the intention of financing the renewables sector. Likewise, there are taxes on road usage and green vehicles that are meant for reducing emissions from the transport sector. All these measures constitute reflecting India’s resolve to harmonise environmental concerns with its tax policy.

2.2 Theoretical Underpinnings

• Polluter Pays Principle (PPP) – According to the PPP, the party responsible for pollution should pay the related costs. This principle has been adopted by Indian courts, particularly in the Vellore Citizens Welfare Forum v. Union of India [1996] 5 SCC 647 case, where the Supreme Court ruled that the polluter has to pay for the environmental damage.
• Ability to Pay and Benefit Theory – The ability to pay principle suggests that tax should be according to the capacity of an individual, thus maintaining horizontal equity. On the other hand, the benefit theory proposes a tax that solely correlates with the public services used. Joint same principles in the area of environmental taxation raise questions about fairness and efficiency. The environmental cost internalisation by green taxes can make their implementation to a large extent onerous for the taxpayers from a certain income level if the taxes are not premeditated disadvantaged groups. Hence, the balance of these principles in green tax policies is crucial as they lead to the direction of environmentally friendly tax policies.

2.3 Legal Foundations in India

The Constitution of India set up the fundamental rights encasing environmental protection. Article 48A requires the government to maintain and enhance the quality of the environment, and Article 51A(g) assigns the participants of citizenship a basic duty to act for the environment. Also, Article 21 ensures the right to a pollution-free environment which is interpreted by the courts as the right to life without pollution in the case of the deceased who have been exposed to pollution. Such constitutional rights create a legal basis for environmental taxes in India.

3. India’s Green Tax Framework – Existing Mechanisms and Instruments

India has enacted a variety of tax mechanisms and benefits to promote environmentally friendly practices, as well as to confront the issues of pollution and environmental concerns. Despite the fact that these measures differ in their scope and impact, they all serve to signal that the country is serious about dealing with environmental matters in its tax policy. A. Coal Cess and GST Compensation Cess, The Clean Energy Cess, which is a tax the government levies on coal mining, began in 2010 with the aim of financing clean energy projects and contributing to the reduction of greenhouse gas emissions from coal-powered plants. Later on, in 2017, this tax was replaced by the GST Compensation Cess set at Rs. 400 per tonne of coal. This was intended to create a pool of funds for the wealthy States and poorer States and Union Territories In 2025, the GST Council restructured the tax, raising the GST on coal from 5% to 18% while at the same time abolishing the Rs. 400 per tonne compensation cess. This was done to bring down domestic coal prices which would make them competitive against imports. Analysts said that the change would cut costs of coal-fired generation leading to raising the power producers’ and consumers’ benefits if the savings flow down to them.

3.1 Green Tax on Vehicles

In a bold move, India decided to tax cars and other vehicles based on their environmental condition to reduce pollution coming from the transport sector. A green cess that varies with the age of the vehicle has been imposed on private cars that are more than 15 years old and on commercial cars that are more than 8 years old. Thus, the policy pushes for a change from the old, polluting cars to the new, clean ones. Governments also enforced a GST Compensation Cess of 1% to 22% on certain vehicles, including luxury cars and SUVs. Nevertheless, this cess was completely abolished in 2025 along with the 15% exemption on hybrids considered to be part of the GST reform.

3.2 Forest Development Tax

A few Indian states impose a tax on timber and forest goods known as a forest development tax to finance conservation and afforestation activities. The purpose of this tax is to create funds for the responsible handling of forest resources. Though not an initiative by the federal government, it is indicative of the climate tax approach in India that is not centralised but decentralised.

3.3 Excise Duty on Fuel

The government of India has placed heavy excise taxes on petrol and diesel, which are not directly named carbon taxes but are having the same impact as they are trying to discourage the use of fossil fuel and at the same time promoting the use of energy-saving methods. The taxes have a significant power in decreasing the release of gases responsible for global warming and at the same time the alternative energy sources are getting more popular.

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