Gujarat State Government first to recognize Carbon credit as intangible goods and propose to levy lower rate of 5% VAT which will drive industrial houses to lower their carbon foot print.

In advent to combat global warming, United Nations Framework Convention on Climate Change’s (UNFCCC) Kyoto Protocol came in force in year 2005 which binds 37 countries with an obligation to reduce emissions of Greenhouse gasses (GHGs). Recently in 2012 Doha climate change talks, Parties to the Kyoto Protocol agreed to a second commitment period of emissions reductions from January 2013 to December 2020.

To enable the developed countries to meet their emission reduction targets, Kyoto Protocol provides three market-based mechanisms – Joint Implementation (JI), Clean Development Mechanism (CDM), and International Emission Trading (IET).

These mechanisms serve the objective of both the developed countries with emission reduction targets, who are the buyers of carbon credits as well as of the developing and least developed countries with no emission targets, who are the sellers/suppliers of carbon credits. The non-polluting companies from less developed countries can sell the quantity of carbon dioxide emissions they have reduced (carbon credits) and earn extra money in the process. This mechanism of buying and selling carbon credits (tradable certificate) is known as carbon trading.

At present CDM is the relevant mechanism in India and with India currently not being under the obligation to reduce its GHG emissions as per the Kyoto Protocol, large numbers of entities are generating carbon credits / Certified Emission Reduction (CER) units.

Taxability on the buying and selling credit is still a grey area. Until on February 20, 2013, Gujarat Finance Minister Nitin Patel, in its tax proposals of the Gujarat budget for financial year 2013-14, introduce tax on trading of carbon credit at the lower rate of 5% VAT as intangible or incorporeal goods to be included in entry 41 of Schedule II of Gujarat VAT Act, 2003 .

The industrial processes will definitely welcome the move as it would clear tax ambiguity and encourage them to use renewable energy resources. Further, purchase of carbon credit will polarize in State of Gujarat as it would cost less than other States and will influence them to follow suit.

Geet Shah (The writer is a Chartered Accountant)

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