Emission of Green House Gases (GHG) by the industries affects the natural environment and is the major cause of global warming and climate change.Carbon dioxide being the major constituent of the GHG, carbon emission trading or carbon trading is an approach to control pollution by providing financial incentives for reduction in the emission of pollutants. Under this system, the Government body allocates permits to the polluters (say industries) to discharge specific pollute in specific quantity for a specific period. If the emission is increased beyond the limit specified in the permit the offender must have to buy permits from others who are willing to sell. They can purchase it from those having excess permits gained out of reduced emission or from the secondary markets. This transfer of carbon credits is also known as Certified Emission Reductions (CERs). One carbon credit is equivalent to the reduction of one tonne of CO2 emission. The main objective of this trading is to achieve emission reduction at the lowest cost so that the seller reducing pollution is gained by selling permit and the pollutant has to pay for polluting.
This permit trading has become instrumental since the adoption of Kyoto Protocol in 1997 which aimed at limiting carbon emissions in developed countries. India though being a developing country having no obligation to submit reduction commitments ratified Kyoto Protocol in 2002 for the greater interest of the mankind. In 2009 India submitted a voluntary target of 20-25% reduction of the emissions intensity of its GDP by 2020 considering2005 as the base year. India has also signed the historic Paris Agreement in April 2016 along with other 180 United Nations Framework Convention on Climate Change (UNFCCC) members where it is agreed to restrict the global average temperature rise to 1.50C by 2030 by reducing the GHG emission. The country submitted its National Climate Action Plan to UNFCCC on 1st October 2015 to reduce emission and to promote clean energy. All these indicate India’s seriousness to address the problem.
Clean Development Mechanism (CDM) and the Present Indian Scenario:
The Article 12 of the Kyoto Protocol stated CDM as the mechanism which allows a country with emission reduction commitment to implement related projects in the developing countries. Thus CDM leads to the cooperation between the developed and the developing. Indian Government took this chance and is a significant gainer since the implementation of CDM in 2003. In the end of 2014 more than 20% of the (1541 out of 7581) CDM Executive Board approved projects were from India.
- VAT (Value Added Tax):
The question evolved in 2009 about the legal position of CER with respect to submission of VAT. The then Joint Commissioner (L&J), Department of trade and Taxes filed an application to the Court of Commissioner to know the status of carbon credits. He sought the clarification whether sell of CERs is taxable under Delhi Value Added Tax (DVAT) Act, 2004 and if so, what should be the rate of tax?
The commission resolved that because of the intrinsic nature of the carbon credits it has gained the status of a commodity and it is traded in the Multi Commodity Exchange of India (MCX). Moreover, CER is certified by the Clean Development Mechanism (CDM) established by Article 12 of the Kyoto Protocol. The essence of this certificate is to have a market value that has the transferability. So CERs is covered under Entry No. 3 of the IIIrd schedule of the DVAT Act, 2004 and the rate of tax is 4%.
- Income Tax:
Several cases like My Home Power Ltd. vs. DCIT [151 TTJ 616, 2014(6) TMI/82], Ambika Cotton Mills Ltd. vs. DCIT(27 ITR 44), Velayudhaswamy Spinning Mills (P) Ltd. vs. DCIT ([(2013) 27 ITR (Trib.) 106], SubhashKabini Power Corpn Ltd. vs. CIT, Bangalore (ITA No. 258, date of pronouncement 28/11/2014) considered sale of carbon credit as capital receipt and not the revenue receipt and is not taxable.
Contractual Issue Related: Future Trading:
Transaction of carbon credit in India is performed on the basis of future contract. This type of contract is only applicable to goods in the form of movable property. Forward contracts in India is regulated by the Indian Contracts Act, 1872 and the Forward contracts (Regulation) Act, (FCRA) 1952. In order to overcome the situation the Union Cabinet on January 25, 2008 passed the ordinance for amending Forward Contracts (Regulation) Act, 1952 but as the bill could not be taken up by the Parliament, the ordinance lapsed and as of now the Forward Contracts (Regulation) Amendment Bill, 2010 is still pending in the parliament.
However, a notification dated 4th January 2008 from the Union Government stated that the provisions of section 15 of the Forward Contracts (Regulation) Act, 1952 (which deals with the forward contracts in notified goods) will be applicable to carbon credits. This paved the way for future trading of carbon credits.
India is one of the largest beneficiaries of Carbon Trading.The carbon credits are traded through MCX but unless and until FCRA Bill is passed volumes of carbon trading is difficult to increase. India is having a large number of sellers but the European market-based buyers are not permitted to enter the Indian market. It is also not clear whether transferring the credits to offshore units leads to export or not. As a whole, an overall policy and legislative framework needs to be introduced to govern all the issues.