Positive & Negative Impacts of Drought Surcharge

Positive & Negative Impacts of Drought Surcharge

Last week on Wednesday, the state government decided to levy a ''drought surcharge'' on a number of items ranging from liquor and fuel to jewelry and cigarettes to raise funds of Rs 1,600 crore for drought affected farmers. The new tax system will be applicable for the coming five months till February 2016 end, after which the state government intends to rationalize it. Political experts term it as a new trend started by the NDA-led state government and believe it may continue in coming years. This step is opposed by Shiv Sena, the ruling partner, the local people and other political parties. Let us discuss the positive and negative impact of drought surcharges from a broader perspective:

Positive

1. The drought surcharge are the increased taxes on host of goods like aerated soft drinks, cigarettes and liquor that are not essential items but come under the luxury group. The sales tax on these three items is increased by 5%, which in turn will raise the prices of these products and reduce the consumption. It indirectly will have a positive impact on overall health costs in country.

2. Also, as per the new rules, the VAT on gold and jewelry is hiked by 0.2% indicating that the consumers may resist to invest in gold at this time, which again will reduce the import burden on country.

3. The state scrapped LBT for traders with turnover less than Rs 50 crore from August 1, 2015. No LBT was levied on soft drinks, cigarettes and liquor.

4. The state government has passed on the benefits of fuel price drop to the customers. Moreover, they even went for removal of value-added tax on petrol. Now, when the state government budget is overburdened, it is the time to levy drought surcharge, and that too for benefit of farmers.

5. It should be noted that even after hiking petrol prices, the tax rate in Maharashtra state, at 27% is much lower than few other states including Kerala, Madhya Pradesh, Andhra Pradesh, Rajasthan and Punjab.

Negative

1. The government levied a surcharge of Rs 2 per litre on diesel and petrol in Mumbai, which is an unwelcome move by the common man. This hike in fuel charges will increase expenses of common people. It appears the government has forgotten that fuel is not a ‘luxury’ product.

2. The decision of drought surcharge implementation indicates that the state government has been largely unsuccessful in maintaining fiscal discipline. In any case, the failure of government cannot be turned into success at cost of taxpayers’ money.

3. It is not clear what the state government wants to do? By levying drought surcharge, the government wants to shift its financial burden on people. They already are finding it hard to deal with high fuel and gold prices.

4. The more severe concern is matter of transparency. There is no surety as to where this Rs 1600 crores funds will go and who will benefit from this new change in tax system. The history reveals that the end users have failed to get the benefits in India. Due to poor system, and sorry state of affairs, only politicians have benefitted from such moves.

Conclusion

The economists consider the surcharge pricing as beneficial for the market. It is stated as a short term and temporary pricing tool that is designed to support the identified need. However, it is also true that drought surcharges tend to offset the decline in consumption and revenue. While such tax system, as in this case five month, have limited application and are subject to legal constraints and often politically debatable, they can help bring in the positive changes over the long term and offer other non-financial advantages, like reduced consumption.