The Direct Taxes Code (DTC) Bill has said that dealings in carbon credit will be taxable under the new regime. The income through such transactions will attract 30 per cent corporate tax.
“Though this tax can, in a way, be considered to be a damper for the industry, it (DTC Bill) has made it clear that carbon credits are a business income. Till now, there was no clarity on carbon credit taxation,” said KPMG executive director Gaurav Mehndiratta.
KPMG deputy CEO & chairman for tax practice, Dinesh Kanabar, however, said the move is unlikely to have an impact, since most big companies had been including their income from carbon credits while disclosing their profits and losses.
“We were paying a 30 per cent tax on carbon credits and DTC or no DTC, we will not be adversely impacted,” said J Suresh Kumar, CFO, Lanco Infratech, that recently got two of its hydro projects registered under the clean development mechanism (CDM).
A Jindal Steel and Power executive said the company was paying around 35 per cent tax on income from some of the projects approved under the CDM mechanism.
KPMG estimated the size of the Indian carbon credits market at $1.8-2 billion (around Rs 9,500 crore). Till date, India has 520 registered Clean Development Mechanism (CDM) projects, out of the total 2,313 projects registered by the United Nations Framework Convention on Climate Change (UNFCCC). These projects have the potential to generate 43 million certified emission reductions (CERs) annually, which amounts to approximately 12 per cent of the total annual CERs generated by registered CDM projects globally.
“As on date, 79 million CERs have been issued to Indian projects and assuming a price of $10 per CER, the value of the actual CER issued to Indian projects amounts to $790 million,” environment minister Jairam Ramesh had said earlier this month.
There are two methods of earning carbon credits. Carbon Offset Credits, which consist of clean forms of energy production – wind, solar, hydro and biofuels – and Carbon Reduction Credits which comprise the collection and storage of carbon from the atmosphere through biosequestration (reforestation, forestation), ocean and soil collection and storage efforts.
“There are two aspects of taxing the carbon credits. One relates to the understanding that these credits were technically meant to compensate the additional cost undertaken by the project owner, an incentive so to speak. So, whether such implicit compensation or incentive could be considered as income or profit is not clear. The second issue is of the fact that the financial analysis for existing CDM projects did not take into consideration any possibility of such tax, therefore the industry may not like it. However, for future projects, it should not create a real problem for them as long as expected carbon prices are sufficiently high,” said Manish Shrivastava, research associate, earth sciences and climate change division, Teri.
The number of carbon credits or CERs issued for a cut in the release of greenhouse gases into the environment is set to triple in India over the next three years, due to a rising number of claims from rapidly growing renewable energy projects, according to research firm Crisil.
Mehndiratta said this tax will also ask the question of a tax holiday and it will have to be ascertained if the project owners’ income is coming from power generation or carbon credits.
