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Resource centre on India's rural distress
 
 

Widening the net beyond the income norm -Abhishek Jain & Shalu Agrawal
-The Hindu

Less than 3 per cent of Indians pay income tax and a significant proportion under-reports taxable income.

On December 28, 2015, the Ministry of Petroleum and Natural Gas announced the exclusion of high-income households from the LPG subsidy cover. As per the official press release, subsidy would not be available for domestic LPG consumers, if the consumer or his/her spouse had taxable income of more than Rs. 10 lakh for the previous financial year. This is a significant step, which has been built upon a series of LPG subsidy reforms that have been undertaken over the last one year.

The first day of last year marked the nationwide roll-out of the modified Direct Benefit Transfer for LPG (DBTL) scheme (also known as PAHAL). The scheme was launched with the objective to prevent diversion of subsidised LPG, by transferring the subsidy amount directly in the bank accounts of the consumers. With more than 14.74 crore LPG consumers enrolled under the scheme (90 per cent of the active number base), it has become the world’s largest cash transfer scheme and has significantly reduced subsidy leakage towards non-domestic uses.

Success of the Give It Up campaign

Subsequent to the implementation of DBTL, which allowed domestic LPG cylinders to be sold at market price, the government launched the ‘Give It Up’ scheme in March 2015. The scheme was aimed at urging well-to-do households, who can easily afford LPG at market price, to give up LPG subsidy, in order to extend the subsidy benefits to poorer households, without increasing the fiscal burden. As a result of an intensive awareness campaign, nearly 57 lakh beneficiaries have voluntarily given up their LPG subsidy. This translates to an annual subsidy saving of Rs. 940 crore for the government, at prevailing prices and consumption trends. Even though this is a significant achievement, it represents a mere 3.6 per cent of the active consumer base.

In comparison, a study conducted by the Council on Energy, Environment and Water (CEEW) in 2014 establishes that the richest 15 per cent of Indian households can easily be weaned of the subsidy, as the full market price (then Rs. 950 per cylinder) is well within their affordability limits. At present, these households account for 25 per cent of the active consumer base. The study also highlights that the richest 10 per cent households in India corner 22 per cent of LPG subsidy, while the bottom 50 per cent households together receive only 30 per cent of LPG subsidy. Thus, the government’s move to target beneficiaries by excluding well-to-do households from the subsidy net is well-founded and timely.

The government has planned to use taxable income (greater than Rs. 10 lakh per annum) as the basis for exclusion and self-declaration of income as the means for identification. While this is a step in the right direction, the modalities of such an exclusion approach need further consideration. For instance, even though the LPG subsidy is given on a household basis, the announcement suggests that the income threshold is applicable to individual incomes and not that of the entire household. Additionally, though self-declaration is a useful form of policy ‘nudge’, the success relies entirely on the integrity of the respondent. To overcome this challenge, should the government consider enforcing the scheme by linking LPG consumer data with the PAN number? Moreover, less than 3 per cent of India’s population pays income tax and a significant proportion under-reports taxable income. Thus, exclusion based on reported income alone would not be as expansive a criterion as is needed indirectly benefiting the tax evaders.

Using multiple criteria

CEEW’s research suggests that it would be more practical and efficient to exclude households based on multiple criteria, simultaneously. One such criterion could be asset-ownership of high-end consumer durables. This could be an important way to capture the material status (wealth) of households than only relying on reported income, particularly in a country where the informal economy is as big as or larger than the formal economy.

Less than 5 per cent of Indian households own passenger four-wheelers, and ownership of this high-end asset is heavily concentrated amongst the richest households. This makes ‘car ownership’ an effective criterion for identifying well-to-do households. Moreover, identification based on car ownership could be achieved by using the national vehicle registration database maintained by Ministry of Road Transport and Highways. However, this database would need streamlining to enable a direct mapping with the LPG consumer database.

Similarly, simultaneous ownership of a refrigerator and an air conditioner, or ownership of multiple air conditioners, could serve as another criterion to identify well-to-do households. Information about the ownership of such assets could be obtained either through self-declaration or by using the Socio Economic and Caste Census (SECC) database. Concerns about the authenticity of this database persist, as this is also self-declared.

Each criterion has its limitation when applied standalone. However, a combination of criteria such as taxable income and ownership of high-end assets, along with a robust database and stringent enforcement mechanism, would help identify and exclude well-to-do households from LPG subsidy effectively.

With the dawn of the New Year, we are hopeful that the political will and leadership, as evinced in the roll-out of the DBTL scheme and Give It Up campaign, would further ensure that millions of households, which continue to rely on traditional fuels, transition towards a cleaner cooking fuel: LPG.

(Abhishek Jain & Shalu Agrawal are researchers at the Council on Energy, Environment and Water, an independent, not-for-profit policy research institution in New Delhi.)