Income Tax on sale of carbon credits:

Introduction:

1.  India, being one of the largest issuers of carbon credits under the Clean Development Mechanism (CDM) of the Kyoto Protocol, has emerged as a significant player in the global carbon market.

2.  From a tax perspective, the characterization and treatment of such income has witnessed an interesting evolution. Initially, courts considered the proceeds as a capital receipt not chargeable to tax, since carbon credits were viewed as a mere by-product of eco-friendly activities.

3.  However, with the introduction of Section 115BBG by the Finance Act, 2017, the legislature brought clarity by taxing such income at a concessional rate of 10%.

Introduction of Section 115BBG (Finance Act, 2017)

1.  Effective from AY 2018–19.

2.  Provides 10% concessional tax rate on income from transfer of carbon credits.

3.  Overridden by “Notwithstanding anything contained in this Act” → special provision.

4.  Applies irrespective of whether income is business or capital.

5.  Carbon credit has been defined as the reduction of greenhouse gases which is validated by the United Nations Framework on Climate Change (‘UNFCC’).

Unresolved Issues & Grey Areas

1.  Other green instruments – renewable energy certificates (RECs), ESG-linked incentives, white certificates – not explicitly covered by Sec. 115BBG. Tax treatment is uncertain.

2.  Cross-border taxation – If carbon credits are sold to foreign entities, is it “business income” or “capital gains” under DTAA?

Interesting case on sale of REC:

1.  Amritsar ITAT in the case of Satia Industries Ltd. v. NFAC (151 taxmann 358) held that Renewable Energy Cerificates were in the nature of entitlement received to improve world atmosphere by reducing carbon / heat and gases emissions, and, thus, such entitlement earned can, at best, be recorded as ‘capital receipt’ and cannot be taxed as ‘revenue receipt’.

2.  Note: RECs are transferable and saleable credit certificates issued by the Ministry of New and Renewale Energy under the Central Electricity Regulatory Commission Regulations, 2010.