KOCHI: Invoking the principle of ‘let the polluter pay’, the first report of the 7th State Finance Commission (SFC) has proposed a pollution tax or user fee on medium and large economic enterprises, marking a decisive push to link local government revenue with environmental accountability and buoyancy of the local economy.
Headed by economist K N Harilal, the SFC also proposed a reworked devolution formula that factors in the ageing population and urban density, signalling a shift towards a more development-sensitive fiscal framework.
The report, submitted by the commission to the government on Thursday, suggested that economic units, which include industries, hospitals, resorts, restaurants, etc., be required to file annual statements detailing the volume of waste or pollutants generated and the mode adopted to treat the contamination. Such a levy, the commission noted, could gradually evolve into a stable and accepted source of revenue for local governments, while simultaneously creating awareness on pollution control and waste management practices.
Beyond the proposed green levy, the report recommended a major overhaul of the devolution framework to reflect Kerala’s demographic transition and mounting urban pressures. It called for additional weighting for urban population or population density and proposed devolving 29% of the State Plan to local self-governments in 2026-27.
“We suggest a tax or a user fee on the polluter following the principle of ‘let the polluter pay’,” the report said, adding that it was possible to design “a simple format” for pollution disclosures “without creating administrative cobwebs”. Filing annual statements on pollution, it argued, would be both revenue-enhancing and “highly informative and awareness-generating”.
While cautioning against an ambitious levy in the initial phase, the report observed that over time it could grow into “a widely accepted and generally abided source of revenue for local governments in the country”.
It advocated involvement of the Union Finance Commission to build wider consensus among states, warning that competition to attract investment could otherwise undermine environmentally sustainable initiatives.
Recognise population density: Report
Another major recommendation is related to Kerala’s advanced demographic transition. The commission urged that appropriate weighting be given to aged population in devolution formula, arguing that an exclusive reliance on headcount failed to capture ageing-related public expenditure pressures. “Regions with ageing population always lose out if an unadjusted population count is used,” the report noted.
It pointed out that a significant portion of public expenditure related to old age — including care homes and expanding palliative care network — fell on local governments. What Kerala was experiencing today, the report said, would need to be emulated elsewhere in the coming years as ageing catches up across the country.
In a broader critique of existing devolution templates, the commission argued that population data concealed important spatial dynamics of development. It called for recognising urbanisation and population density, noting that centres of economic and demographic concentration faced higher costs of service delivery due to factors such as land prices, congestion and demand for specialised public services.
“Denying taxing powers to centres of concentration of population and economic growth is akin to denying resources to the growth poles of the economy,” the report said.