Higher Fares, Poorer Services: The Impact of High Taxation on Public Buses in India

If you’re a user of public transport in India, you’re statistically most likely to take the bus. A recent National Sample Survey Office report indicated that buses are the most frequently cited mode of transport across both rural and urban areas, with close to two-thirds of respondents reporting travel by bus. In smaller towns and cities with minimal suburban rail facilities, buses serve as the sole mode of formal public transport, and even in Delhi – which has an excellent metro rail network – approximately 64% of public transport trips are by bus. In short, buses represent a critical link in Indian mobility, and are unlikely to lose relevance in the near future.

The bulk of bus-based public transport in the country is operated by a total of 62 government-owned State Transport Undertakings (STUs) that cater to over 70 million daily passenger-trips. STUs do not operate on purely commercial lines; as highlighted by the Planning Commission’s Working Group on Road Transport, their fares are determined by the relevant state government and are often extremely low; they operate on many non-remunerative routes to ensure connectivity across their geographical areas; and they provide a wide range of concessional passes to economically disadvantaged citizen groups. STUs aren’t thus profit-maximising entities; they serve several social functions as well. As a result, most STUs in India find themselves in a financially precarious position, extremely vulnerable to fluctuations in operating cost. Unfortunately, as this blog post shows, India’s tax environment for buses – rather than providing fiscal incentives to STUs to support them financially – contributes significantly to their financial instability, which in turn impacts the quality of bus services for commuters.

Across the world, public transport is often subsidised to offset the gap between costs and revenues. Tax exemptions and rebates form an important part of this subsidy. In India, rather paradoxically, the current tax policy for STUs treats them as commercial entities, effectively taxing them at higher rates than private vehicle users. Government bus operators are liable for as many as 13 different taxes on their assets and operations, including motor vehicle tax, passenger tax, stamp duty, property tax, municipal levies, service tax on air-conditioned bus fares, customs duty, and others.

Not every tax is equally significant, and different taxes work in different ways: indirect taxes are taxes bundled into the costs of inputs (such as buses, fuel and spare parts), and these taxes increase STU expenditure on consumables. Direct taxes are usually levied on property owned by STUs (buses and land), with some states also levying direct taxes on passenger revenue earned by STUs. With Motor Vehicle Tax and duties on fuel the most significant taxes, it has been estimated that taxes contribute close to 20% of an STU’s operating cost.

Why is this problematic? In escalating the operating costs of an STU, taxes force operators to seek grants from the state or central government for even minor service improvements or fleet augmentation as they lack surplus capital to reinvest into systemic improvements. An interesting case study is from 2015: of all reporting STUs, ten STUs declared a surplus before taxes, but only three remained self-sufficient after clearing their direct tax liabilities.

Unfortunately, government grants are often slow to arrive and depend on the prevailing political climate or yearly government financial priorities, making them an unreliable source of funds for long-term fleet enhancement plans. Thus, in denying several STUs the financial autonomy to unilaterally improve services, taxes exacerbate delays in fleet augmentation, service enhancement, and the increased adoption of technology to improve maintenance and disseminate real-time information to passengers.

Another impact of high taxation on public buses is on fares. If proposals for fare increases by STUs – driven by higher operating costs and their tax component – are approved by the respective state government, this places a disproportionate burden on commuters with lower incomes, who have no alternative but the bus for long-distance commutes.

How would the reduction of taxes impact STUs? There’s no one-size-fits-all answer for India as tax rates vary highly by state, but the case of the Bangalore Metropolitan Transport Corporation (BMTC), the operator in Bengaluru, is instructive. In 2014-15, the operator reported a loss of INR 649 million, with a total tax liability of INR 3.096 billion from Motor Vehicle and fuel tax alone. The surplus BMTC would have declared in the absence of these taxes is INR 2.447 billion. Thus, after excluding BMTC’s losses for the year, every 1% reduction in these taxes translates to 6.99 extra buses the Corporation could have bought, improving bus frequencies and reducing overcrowding on its peak-hour services.

Taxing public buses at high rates, is in many ways, the low-hanging fruit for a government to increase fiscal revenue. From a commuter’s point of view, however, taxes both contribute to higher fares and declining service quality – hardly an incentive to use the service. In the long run, this is likely to make the use of private vehicles more attractive, adding to urban congestion in India.