Significance of Tax Reduction on Income from Carbon Credits

October 3, 2020 By Manish Dabkara

 In the modern world, it is hard not to notice the increasing effects of Carbon dioxide in our daily lives. The carbon dioxide levels have been shooting up at an alarming rate in the recent years, the major contributors being activities like combustion of fossil fuels, industrialization, deforestation etc. India, being a developing country is considered one of the major contributors in carbon emission. Though it is a worrying prospect, in the light of the latest announcements made as part of Budget 2018, there is a bright side this gloomy situation has to offer.

What is Carbon trading

Kyoto protocol, developed under the UNFCCC- the United Nation Framework Convention on Climate change brought together 169 countries to reduce carbon emissions. The devised carbon trading under this protocol is an exchange of carbon credits between nations that is specifically designed to reduce emissions of carbon dioxide. It is an innovative step in the direction of a healthy environment

There is no denying the fact that global warming is one of the major threats to humankind and we can combat it only by collaborative efforts on a global level if we intend to lessen the impact of this threat. Indeed, trading of carbon credits is a smart solution to this problem that the world faces.

Union Budget of India 2018

The income earned on the transfer of carbon credits, as per the explanatory memorandum to the Finance Bill, has been treated as business income by the income tax (IT) department. This income was taxed at the rate of 30% till now.

In the light of the Budget 2018 which proposes to reduce the tax on income from carbon credits to 10% from 30%, trading of carbon credits becomes more interesting and appealing across the industries and even individuals. This amendment will take effect from April 1, 2018.

Budget document also emphasizes on bringing clarity on the issue of taxation of income from transfer to carbon credits. Also, to encourage measures to protect the environment a proposal to insert a new section 115BBG is made. Under this section, concession rate of income tax at 10% (plus applicable surcharge and CESS) will be offered to the assessment if the total income includes any income from transfer of carbon credit which will be applicable on the gross amount of such income. No expenditure or allowance in respect of such income shall be allowed under the Act.

Benefitting India and its people

Being a developing country India doesn’t have binding targets of carbon emission to meet. Thus, we have ‘credits’ for emitting less carbon that can be offered to countries that have a deficit. Emitters that reduce their emissions at a cheap rate sell their surplus allowances to emitters with higher reduction costs.

Conclusion

The carbon credits trading business will likely emerge as the most profitable business in the coming times. It occupies the fastest growing financial market in the world economy presently. As a developing country, India has a large potential for greenhouse gases reduction and carbon trading business. With recent changes and signs of support and recognition from the Indian government, it is a promising time for carbon trading.

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