A Carbon credit is basically a concept/ mechanism for measuring the reduction of carbon emission/ greenhouse gases. The concept/ mechanism was firstly introduced in an international treaty which is popularly known as the ‘Kyoto Protocol’.

The present article tries to clarify the position of the levy of GST on Carbon Credit.

Understanding the term Carbon Credit

Basically, the companies are required to meet the carbon emission target which is set up by the respective Government. In case the company exceeds the respective target, the company would be penalized/ fined for the same. However, in case the company minimizes the carbon emission, they will be awarded/ benefited with Carbon Credit.

In simple words, Carbon Credit is a permit that allows the holder company to emit a specific amount of carbon dioxide/ other greenhouse gases. Basically, one carbon credit permits the emission of the mass equal to one ton of carbon dioxide.

In other words, the reduction in emission of one metric ton of carbon dioxide is equivalent to one Carbon Credit.

Thus, the company which are unable to meet the carbon emission target will purchase such carbon credit from the company that has surplus credits.

Trading of Carbon Credit

Carbon trading can be said to be buying and selling of artificially created commodity i.e. the right to emit the carbon dioxide. Simplifying further, if the company buys ‘Carbon Credit’ it is buying the right to burn more carbon emission. Similarly, if the company sells ‘Carbon Credit’ it is selling the right to burn carbon emission.

Levy of GST on the trading of Carbon Credit

Notably, the government has not come up with any specific clarification with regard to the levy or non-levy of GST on the trading of Carbon Credit.

However, vide circular no. 34/8/2018-GST dated 1st March 2018, clarification was provided with regard to the levy of GST on various services. One such clarification related to levy of GST on Priority Sector Lending Certificates.

As per the clarification, Priority Sector Lending Certificates may be construed to be in the nature of goods. Further, it was clarified that Priority Sector Lending Certificates are similar to freely tradeable duty scrips or Renewable Energy Certificates or REP License/ replenishment license which attract VAT. Accordingly, it was clarified that there is no exemption, under GST, to trading in Priority Sector Lending Certificates and hence they are taxable at 18% GST.

As seen above, under Carbon Credit also companies having reduced carbon emission can trade the surplus to the companies having excessive carbon emission. Priority Sector Lending Certificates are to a great extent similar to that of the Carbon Credit. Additionally, Carbon Credit has its own market value and are also freely transferable in the market.

Hence even though not directly linked/ covered, the clarification provided vide above referred circular applies to Carbon Credit as well and accordingly the trading of the same is taxable under GST.

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Qualification: CA in Job / Business
Company: Taxguru Consultancy / Taxguru Edu
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