Understanding Carbon Credits – Taxation & Financial Perspectives

Last Updated at: April 20, 2020
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Understanding carbon credits

As the Earth is common for all nations, civilizations and generations, the environmental issues are also affecting everyone. The exploitation of natural resources is one of the most serious global issues that has resulted in the climate change, which we fail to combat with. This is where carbon credits come to play. Let’s see about what is carbon footprint as well.
“The ultimate test of man’s conscience is our willingness to sacrifice something today for future generations whose words of thanks will not be heard.”

                                                                                                           Gayford Nelson

The Earth is all we have in common, across nations, generations and civilizations. Environmental issues, especially those related to the exploitation of natural resources, are perhaps the most global, both in their essence and scale of action and consequently, the future of humankind largely depends on the ability to create an effective web of governance, combating climate change.

Explore our legal help services to protect your intellectual property, secure funding from Venture Capitalists & comply with the many regulations of the MCA information and resources to help you through your end to end business requirement.

 

So, what are carbon credits?

Carbon credits are now being universally recognized as a term to highlight emissions equaling to one tonne (or 1000 kilos) of carbon dioxide gas or other harmful gases like methane and nitrogen oxide. As industries, manufacturing units and production expands, there is a net increase in the overall emission being made unless alternative mechanisms to reduce such emissions are found and put in place. The Kyoto Protocol prescribes a Certified Emission Reduction (CER) certificate, which enables an entity to trade any excess of credit justify after satisfying their internal assigned limit of reduction.

Ask Free Legal advice

The underlying idea is that business entities should mutually contribute to reducing emissions at national and international levels since progress on this front can be made only with sustained and combined efforts.

Thus, if an entity wants to exceed its assigned limit of allowable carbon-dioxide emission, it can be allowed to do so only if it pays another entity that has spare credits. It is virtually the amount being paid to off-set the damage being caused to the environment, which can be utilized for research and construction of alternative energy source plants or tapping into renewable sources like solar or wind energy.

Sale of carbon credit in India – Business income or not?

Till sometime ago, it was disputed whether the sale of carbon credits, being a business practice would fall under the head ‘Profits and Gains from Business and Profession’. The version that supported it was based on the reasoning that it is a profit realized in the books of the company and should be subject to tax at the rate of 30 per cent. However, it was perceived that this rate of taxation was rather high and dissuading companies with excess credits to part with them.

Concessional tax rate on carbon credit income tax since April, 2018

After a recent amendment, a new section has been inserted in the Income Tax Act that now taxes carbon credits at the rate of 10 per cent, instead of subjecting it to the regular tax of 30 per cent. The new section 115BBG applicable from the assessment year 2018-19 in relation to carbon credits specifies that where the individual’s income includes any income from transfer of carbon credits, the same would be subject to taxation of 10 percent, with no deduction being allowable for expenditures made for the same.

This section does not restrict itself to just businesses and hence individuals that may acquire carbon credits may avail advantage of this section. Another perspective is that this section that now offers a twenty percent reduction in tax payable on such income, may result in setting up of more environmentally conscious companies, which would now be interested in making profits from sale of carbon credits while paying 10 per cent tax on the income as opposed to the regular 30 per cent tax plus applicable surcharges.

Who decides the price of carbon credits?

A natural question that arises is whether companies are free to charge their carbon credits at a price they fix of if there are guidelines on fixation of prices of this tradable certificate. While the United Nations Framework on Climate Change is one of the validating bodies responsible for oversight, it does not formulate pricing guidelines. Carbon credits are increasingly being promoted as a market commodity capable of being bought and sold in the open market, privately and be available for exchange on the commodities market, a practice that has already begun at NASDAQ and the European Climate Exchange. It is believed that through this reinforced effort, businesses and individuals would be able to come together and reduce national emissions prescribed.

Well, any business or entity should focus on reducing emissions but there are national and international levels of the same. If an entity needs to go beyond this specified carbon emission limits, then it can do so by paying for the carbon credits owned by another company. However, it is harmful to do so as it will ruin the sustainable efforts to keep the environment safe.

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Understanding Carbon Credits – Taxation & Financial Perspectives

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As the Earth is common for all nations, civilizations and generations, the environmental issues are also affecting everyone. The exploitation of natural resources is one of the most serious global issues that has resulted in the climate change, which we fail to combat with. This is where carbon credits come to play. Let’s see about what is carbon footprint as well.
“The ultimate test of man’s conscience is our willingness to sacrifice something today for future generations whose words of thanks will not be heard.”

                                                                                                           Gayford Nelson

The Earth is all we have in common, across nations, generations and civilizations. Environmental issues, especially those related to the exploitation of natural resources, are perhaps the most global, both in their essence and scale of action and consequently, the future of humankind largely depends on the ability to create an effective web of governance, combating climate change.

Explore our legal help services to protect your intellectual property, secure funding from Venture Capitalists & comply with the many regulations of the MCA information and resources to help you through your end to end business requirement.

 

So, what are carbon credits?

Carbon credits are now being universally recognized as a term to highlight emissions equaling to one tonne (or 1000 kilos) of carbon dioxide gas or other harmful gases like methane and nitrogen oxide. As industries, manufacturing units and production expands, there is a net increase in the overall emission being made unless alternative mechanisms to reduce such emissions are found and put in place. The Kyoto Protocol prescribes a Certified Emission Reduction (CER) certificate, which enables an entity to trade any excess of credit justify after satisfying their internal assigned limit of reduction.

Ask Free Legal advice

The underlying idea is that business entities should mutually contribute to reducing emissions at national and international levels since progress on this front can be made only with sustained and combined efforts.

Thus, if an entity wants to exceed its assigned limit of allowable carbon-dioxide emission, it can be allowed to do so only if it pays another entity that has spare credits. It is virtually the amount being paid to off-set the damage being caused to the environment, which can be utilized for research and construction of alternative energy source plants or tapping into renewable sources like solar or wind energy.

Sale of carbon credit in India – Business income or not?

Till sometime ago, it was disputed whether the sale of carbon credits, being a business practice would fall under the head ‘Profits and Gains from Business and Profession’. The version that supported it was based on the reasoning that it is a profit realized in the books of the company and should be subject to tax at the rate of 30 per cent. However, it was perceived that this rate of taxation was rather high and dissuading companies with excess credits to part with them.

Concessional tax rate on carbon credit income tax since April, 2018

After a recent amendment, a new section has been inserted in the Income Tax Act that now taxes carbon credits at the rate of 10 per cent, instead of subjecting it to the regular tax of 30 per cent. The new section 115BBG applicable from the assessment year 2018-19 in relation to carbon credits specifies that where the individual’s income includes any income from transfer of carbon credits, the same would be subject to taxation of 10 percent, with no deduction being allowable for expenditures made for the same.

This section does not restrict itself to just businesses and hence individuals that may acquire carbon credits may avail advantage of this section. Another perspective is that this section that now offers a twenty percent reduction in tax payable on such income, may result in setting up of more environmentally conscious companies, which would now be interested in making profits from sale of carbon credits while paying 10 per cent tax on the income as opposed to the regular 30 per cent tax plus applicable surcharges.

Who decides the price of carbon credits?

A natural question that arises is whether companies are free to charge their carbon credits at a price they fix of if there are guidelines on fixation of prices of this tradable certificate. While the United Nations Framework on Climate Change is one of the validating bodies responsible for oversight, it does not formulate pricing guidelines. Carbon credits are increasingly being promoted as a market commodity capable of being bought and sold in the open market, privately and be available for exchange on the commodities market, a practice that has already begun at NASDAQ and the European Climate Exchange. It is believed that through this reinforced effort, businesses and individuals would be able to come together and reduce national emissions prescribed.

Well, any business or entity should focus on reducing emissions but there are national and international levels of the same. If an entity needs to go beyond this specified carbon emission limits, then it can do so by paying for the carbon credits owned by another company. However, it is harmful to do so as it will ruin the sustainable efforts to keep the environment safe.

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Avani Mishra is a graduate in law from the National Law Institute University, Bhopal. She qualified the Company Secretary course with an All India Rank 1 and is a recipient of the President’s Gold Medal for her academic distinctions. She also holds a B.Com degree with a specialization in Corporate Affairs and Administration.