SPECIAL ARTICLEEconomic & Political Weekly EPW october 11, 200841Urban Public Transport Systems: Are the Taxation Policies Congenial for Their Survival and Growth?P S Kharola, G TiwariPublic transport systems in cities in India are largely bus-based and operated by public agencies. The performance of these organisations on the financial front has been rather wanting. Several reasons – both internal and external – have often been cited for their unsatisfactory performance. One of the less researched areas has been the various taxes these organisations have to bear. This paper analyses the different levies on the operation of buses in a city and also attempts to compare these in different states in the country. It also compares the taxes levied on other modes of transport. The impact of these taxes on the total operating costs is brought out. It is concluded that the high rate of various taxes are one of the important reasons for the financial unviability of public transport systems in India. Besides, as compared to other modes of transport, the levies on the public transport system are quite inequitable. The paper concludes by highlighting that the taxation regime for vehicles needs a total overhaul.P S Kharola and G Tiwari (geetamt@gmail.com) are with the Transportation Research and Injury Prevention Programme, Indian Institute of Technology, New Delhi.Taxes are imposed by governments to achieve various ob-jectives. Oliver Wendell Holmes1 once said:“I like to pay taxes. With them I buy civilisation”. However, from an economist’s viewpoint, taxes can be used to achieve several ob-jectives. Mobilising resources for the government is the primary objective of levying taxes. Giving a proper macroeconomic direc-tion to an economy is a major objective of taxes. Taxes lead to re-distribution of income (direct taxes), taxes also alter the price of goods (indirect taxes). On the contrary, neoclassical economists argue that taxes lead to distortions in the market and hence adversely affect allocation of resources. The immediate effect ofany tax on a good or service is that the cost or price of that good or service increases as the tax is ultimately passed on to the consumer. 1 TheoryofTaxation According to classical economists, if market forces are allowed to operate freely, they would bring about equilibrium between demand and supply at an optimal level. However, this does not happen in case of activities which produce externalities. Transportation leads to externalities – both positive and negative. The negative ones being environmental pollution, accident hazards, road damage and congestion – in all these cases the party responsible for these outcomes, the vehicle user, does not bear the full consequences of these outcomes. In other words, the cost which the vehicle user bears does not include the costs which many external parties bear. If it could be ensured that full cost is passed on to the vehicle users, they would be compelled to make the economically right decision on the extent to which they should use the vehicles. Economic theory states that for a vehicle user, equilibrium will be achieved at the intersection of the marginal benefit and the marginal private cost curves, whereas the optimum would be at the intersection of marginal benefit and marginal social cost curves. A tax equal to the marginal external costs (Pigouvian tax) on the activity would increase the marginal costs to the vehicle users – the external costs would be internalised and the actual equilibrium would shift to the optimum equilibrium.Taxes on passenger transport – public and private modes – have primarily been viewed as resource mobilisation measures by the taxation authorities. Using taxes as an economic tool to achieve objectives like optimum utilisation of resources and internalising the externalities has not received the due attention. In India taxes on passenger transport vehicles and related aspects have two characteristic features – multiplicity 
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Fuel 35% 
Bombay Municipal Corporation Act 1888 -192-(1) Except as hereinafter provided, a tax, at rates not exceeding those respectively specified in Schedule H, shall be levied in respect of the several articles mentioned in the said Schedule, or so many of them or such of them as the Corporation shall from year to year in accordance with Section 128 determine, on the entry of the said articles into Greater Bombay for consumption, use or sale therein. The said tax shall be called an “Octroi”. Bombay Municipal Corporation Act 1888.
