Sale proceeds of carbon credits will not escape tax when the new Direct Taxes Code comes into effect from April 1, 2012. This is because the DTC Bill 2010 has explicitly stated that money received or receivable from transfer of carbon credits will be treated as business income and taxed accordingly. Such a provision if enacted will remove the current uncertainty surrounding the taxation of carbon credits, say tax experts.
In the existing income tax law, there is no explicit provision that brings transfer of carbon credits under the tax net. In the absence of an explicit provision, there were disagreements between companies and the tax department on the taxability of carbon credits.
It was often contended that cash credits were in the nature of capital receipts and therefore could not be subjected to income tax. There were also sections that considered carbon credits as revenue receipts and hence felt that it should be subjected to tax.
The availability of tax incentives (profit linked deductions) for certain industries also complicated the issue of taxability of carbon credits.
However, the DTC Bill has now proposed to move away from profit linked deductions in respect of most segments except in the case of SEZ developers and SEZ units.
“The current income tax law has no provision on carbon credits. It is a grey area. However, the DTC Bill has sought to clarify the position and clearly mentions that carbon credit sale will be categorised as business income. So under the proposed regime, carbon credits will be treated as revenue receipts and will also attract tax,” Mr Sameer Kanabar, Tax Director, Ernst & Young, told Business line.
Some industry observers, however, contend that bringing carbon credits into tax net may be a retrograde step as it will discourage corporates from working towards reduction in carbon emissions and preventing global warming.
China and India account for about 75 per cent of the carbon credits issued, according to the United Nations Framework for Climate Change. Many Indian corporates had in the recent years earned tidy profits from carbon credit trade, but had not provided for any tax in the books of accounts in the absence of specific provision in the income tax law.