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Taxability of Carbon Credits / Certified Emissions Reductions in India

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Carbon credits are tradeable certificates or permits that allow the owner to emit a certain amount of carbon dioxide or other greenhouse gases in excess of their permissible limits. One carbon credit represents one tonne of carbon dioxide that an organization is permitted to emit.

Carbon Credit Market

On the basis of the certification, the carbon credits can be classified into two types -

1. The Carbon Credits [known as Certified Emissions Reductions (CERs)] certified under UNFCCC’s Clean Development Mechanism. These carbon credits are primarily purchased so as to meet the state imposed restrictions under the Kyoto protocol. The validation from UNFCCC is long drawn-out process and requires approval from national CDM authority first.
2. The carbon credits certified by various self regulated certification agencies which are traded purely on voluntary basis in the voluntary carbon credits market. These are purchased primarily to meet self imposed net zero emissions target.

Taxability of carbon credits under Indian Direct Tax Laws (Income Tax)

With effect from 1st April 2018, Section 115BBG of the Income-tax Act has been inserted. The provision explicitly provides that the income from the transfer of UNFCCC validated carbon credits is taxable at the rate of ten (10) per cent. Also, no deduction in respect of any expenditure or allowance is allowed under this section.

Prior to 1st April 2018, there was a lack of clarity and litigation ensued between the revenue and the assessees in various cases. In one of the cases, the Madras High Court held that the earnings from the sale of carbon credits would be in the nature of capital receipt and would therefore not liable to income tax. However, appeal from the Revenue is pending before the hon’ble Supreme Court in this case.

Despite the 2018 amendment, there is still lack of clarity regarding taxability of income from sale of carbon credits not validated by UNFCCC. In this regard, it is important to note that the 2018 amendment taxes the income from transfer of carbon credits but fails to expressly categorize it as a revenue receipt. The settled position of law would become clear only after the Supreme Court pronounces its order in the above mentioned appeal.

However, in light of Section 115BBG, a relatively safer position would be to pay the income tax on the income arising out of sale of non validated carbon credits after claiming the applicable deductions in respect of the expenditure.

Taxability of carbon credits under Indian Indirect Tax Laws (GST)

By the legislative scheme of the GST laws, it is applicable to only goods or services. Thus, anything which is not covered within the term “goods” or “services” can never be subjected to the GST. Thus the applicability of GST on carbon credit depends on the fact whether it is covered within the meaning of the word “goods”.

Section 2(52) of the Central Goods and Services Tax Act, 2017 (“CGST Act”) defines the term - “goods” means every kind of movable property other than money and securities but includes actionable claims, growing crops, grass and things attached to or forming part of the land which are agreed to be severed before supply or under a contract of supply.”

A careful examination of the term “securities” under CGST Act leads to the conclusion that the carbon credits are not covered within the definition.

Moreover, the Central Government vide Notification No. S.O.3068(E) dated September 27, 2016 notified carbon credits to be treated as goods (commodity derivative) for the purposes of clause (bc) of section 2 of the Securities Contract (Regulation) Act.

Further, the Central Government issued a clarification vide Circular No. 34/8/2018-GST dated 01.03.2018 to clarify that priority sector lending certificates (PSLCs) are akin to renewable energy certificates (RECs) and they are not securities and therefore subject to 18% GST under residual head. It is important to note that carbon credits, in essence, are similar to the RECs. Another Circular No. 46/20/2018-GST dated 06.06.2018 clarified that RECs, PSLCs etc. are classified under heading 4907 and will accordingly attract GST @ 12 % instead of 18% under the residual head.

A conjoint reading of all the above provisions will lead to the conclusion that the supply of carbon credits would be subject to 12% GST as they are akin to RECs. Please note that this tax rate has been increased to 18% with effect from 1st October 2021, as pointed out below.

Ministry of Finance, Department of Revenue vide its Notification No. 8/2021-Central Tax (Rate) dated 30.09.2021 has clarified that applicable GST rate for Heading 4907 is now 18% w.e.f 1st October 2021. Any transaction of REC on or after 1st October 2021 is therefore liable to tax @18%.

GST on export of carbon credits

The export of carbon credits would not be subjected to GST as it would be a zero-rated supply.

Concluding Remarks

The government needs to come up with a well enunciated taxation framework for the carbon credits market in order to address the ambiguity.

At present, ten (10) percent income tax is applicable on UNFCCC validated carbon credits, however, there is an ambiguity with respect to other carbon credits.

Also, there is an ambiguity with regards to applicability of GST on supply of carbon credits. However, a detailed examination of the extant laws in place would require payment of GST under twelve (12) per cent slab.