The Hindu Business Line : Pollution tax

The problem of designing national and international carbon taxes is akin to the problem of public finance with many levels of government or fiscal federalism, observes M. N. Murty in Environment, Sustainable Development, and Well-being ( www.oup.com).

The book proposes, therefore, a federal set-up where the world economy has many levels of authority (say an International Agency or IA, and national governments), with the optimal national and international taxes on CO {-2} emissions.

The author argues that a national carbon tax can be inefficient if its design does not take into account the global climatic effects of CO {-2} emissions.

“Independent or isolated decisions about carbon taxes by countries will take into account only local effects and, therefore, taxes fixed through a set of such decisions are not optimal from the point of control of global environmental pollution.”

Assuring that an optimal carbon tax for the world economy can be designed taking into account the effects of carbon emissions of a country on climatic changes and their effects on the welfare of people in different countries, he proceeds to present mathematical models and Lagrangean equations.

The ‘second-best' domestic as well as international carbon taxes can be designed, says Murty, by using the many-person and many-country Ramsey model for the world economy. “Optimal carbon taxes are country-specific and a tax on a domestically produced carbon-intensive commodity can be decomposed into a revenue tax, a tax to control local atmospheric pollution, and an international carbon tax.”

The optimal international carbon taxes and revenue transfers and national pollution taxes can be obtained as a solution to the Nash non-cooperative equilibrium of the world economy in which an IA and national governments are players, he explains.

For, as you may appreciate, “Controlling environmental externalities with different spatial dimensions requires a complex set of instruments and institutions.”

Ideal read for the avid pollution researchers, and prescribed study for the inveterate polluters.

Valuation of perquisites

Where an employee receives remuneration from two or more employers simultaneously, and one of those employers has provided the employee with rent-free residence, what should be the definition of ‘salary' for the purpose of valuing the perquisite? It is ‘the aggregate salary from all the employers,' answers a recent Taxmann publication on New Rules Governing Taxation of Perquisites ( www.taxmann.com).

While such a view (based on the 1989 decision in CIT vs Mohanlal Jalan) may be legally correct, it is bound to cause hardship to the employee, especially in the new set-up under which the value of the perquisite is to be taken at the flat rate of a percentage of salary, the authors note.

“The possibility of the value of the perquisite being more than the rental value or the rent paid cannot be ruled out. It is desirable that the provision is amended so as to ensure that the value of the perquisite is restricted to the rental value or the rent paid by the employer.”

In a chapter on `foreign companies,' the authors mention that stock options given by a parent company to employees of its 100 per cent Indian subsidiary attract tax under Section 17(2)(vi); and the reference given in the book is of a 1998 Advance Ruling based on the doctrine of `lifting the corporate veil.'

What if the subsidiary is not a 100 per cent subsidiary of the holding company? "There is no bar to lifting the corporate veil in cases where the subsidiary is not 100 per cent owned by the holding company so long as the facts and circumstances of the case justify it," the authors caution.

Handy reference for tax professionals.

D. MURALI