Taxability of Carbon Credits

What are Carbon Credits?

Carbon Credits is an incentive given to  an industrial undertaking for reduction of the emission of GHGs (Green House Gases), including carbon dioxide which is done through several ways such as by switching over to wind and solar energy, forest regeneration, installation of energy efficient machinery, landfill methane capture, etc.

Why is there need for Carbon Credits?

• The Kyoto protocols commit certain developed countries to reduce their GHG emissions and for this, they will be given carbon credits.
• Every Industrialized nation has been given certain quota of units; The quantity of the initial assigned amount is denominated in individual units, called Assigned amount units(AAUs), which is equivalent to emission of 1 Ton of CO2 or equivalent emissions of other greenhouse gases like Methane, Nitrogen oxides etc. and these are entered into the country’s national registry.
• Now if a country doesn’t use up its entire allowance of credits, it can either save it or exchange it for money or give it to some country which has exceeded its limit. If a country uses up its entire limit, it has to buy credits from another country that has not used up its entire allowance.
• Similarly, Operators that have not used up their quotas can sell their unused allowances as carbon credits, while businesses that are about to exceed their quotas can buy the extra allowances as credits, privately or on the open market.
• All these transactions are expressed in Carbon credits and their trading in the market is called “Carbon Trading / Emission Trading.

Certified Emission Certificate

A reduction in emissions entitles the entity to a credit in the form of a Certified Emission Reduction (CER) certificate.

Whether CER are tradable?

The CER is tradable and its holder can transfer it to an entity which needs Carbon Credits to overcome an unfavorable position on carbon credits.

Taxability of Carbon Credits

Income-tax Department has been treating the income on transfer of carbon credits as Business Income which is subject to tax @ 30%. However, divergent decisions have been given by the courts on the issue as to whether the income received or receivable on transfer of carbon credit is a revenue receipt or capital receipt.

In order to bring clarity on the issue of taxation of income from transfer of carbon credits and to encourage measures to protect the environment, it is proposed to insert a new section 115BBG to provide that where the total income of the assessee includes any income from transfer of carbon credit, such income shall be taxable at the concessional rate of 10% (plus applicable surcharge and cess) on the gross amount of such income.

No expenditure or allowance in respect of such income shall be allowed under the Act.

This amendment will take effect from 1^st April 2018 and will, accordingly, apply in relation to the AY 2018-19 and subsequent years.

Section 115BBG : Tax on income from transfer of carbon credits.

115BBG. (1) Where the total income of an assessee includes any income by way of transfer of carbon credits, the income-tax payable shall be the aggregate of—

(a) the amount of income-tax calculated on the income by way of transfer of carbon credits, at the rate of ten per cent; and

(b) the amount of income-tax with which the assessee would have been chargeable had his total income been reduced by the amount of income referred to in clause (a).

(2) Notwithstanding anything contained in this Act, no deduction in respect of any expenditure or allowance shall be allowed to the assessee under any provision of this Act in computing his income referred to in clause (a)of sub- section (1).

Explanation.—For the purposes of this section “carbon credit” in respect of one unit shall mean reduction of one tonne of carbon dioxide emissions or emissions of its equivalent gases which is validated by the United Nations Framework on Climate Change and which can be traded in market at its prevailing market price.

[Updated Up to Finance Act 2017]