India’s energy sector is in the early stages of a slow but steady transition. While there are various studies which analyse the potential pace of the transition with a focus on decarbonisation, its required physical infrastructure and associated investments, one relatively neglected dimension is the implication of the energy transition on public finance in general, and energy taxation in particular. The energy sector, and in particular, fossil fuels are a significant contributor to the overall revenue of India’s central and state governments. This revenue predominantly comes from the petroleum (& natural gas) and coal sectors, which contributed about Rs. 6 lakh crore of the total Rs. 6.5 lakh crore revenue from the energy sector in 2019-20. The Centre and states are quite dependent on the energy sector for their taxation revenues, with the Centre’s dependence being as high as 25%.

As the energy sector moves away from fossil fuels and shifts towards a greater share of renewables and greater electrification, these tax revenues will come under strain. While this transformation away from fossil fuels is likely to take place over the next two decades, the attendant reform in the tax regime is also likely to be very complex and involve nuanced political negotiations. Therefore, it is important to anticipate the fiscal challenges that may arise out of the transition and prepare for it. A starting point is to commence discussions on a gradual transformation of the taxation regime, going beyond just the energy sector or even just indirect taxes. In this context, there is a need for a deeper understanding of the role of the energy sector in the country’s public finance, and how this is likely to be impacted with the energy transition. Such an understanding can help to begin a conversation that can help identify suitable fiscal alternatives and taxation regimes to ensure that public revenue streams can be suitably reworked as the structure of the energy sector changes.

The objective of this working paper is to develop such an understanding in order to build a discourse around this important topic, rather than to recommend any specific measures.

An article on this topic was published in The Indian Express on 3rd March 2021.

Minor corrections in Table 4 have been made to this version from the one uploaded in February 2021.