The INCOME-TAX DEPARTMETN is reportedly mulling a tax on carbon credit trade
and the revenue potential of the proposed impost is said to be about Rs. 1,000
core a year. What are the implications of the more for the industry?
Carbon credits (CCs) are meant to provide a way to reduce greenhouse emissions
on industrial scales by the capping of total annual emissions. The market
assigns a money value to shortfalls, if any, through trading. The credit can
be exchanged between businesses or bought and sold internationally at the
rates prevailing at the time the deal is made. They can also be used to finance
carbon reduction schemes between trading partners in a country or around the
world.
A CC is defined as the unit related to reduction of one tones of CO2 (carbon
dioxide) emission from the baseline of the project activity. Under International
Emissions. Trading (IET), countries can trade in the international CC market
to cover their shortfall in allowances. Those countries which have surplus
can sell these to countries who have capped emission commitments under the
Kyoto Protocol. This enables a developed country to buy CCs off the shelf
through the instrumentally of a ‘climate exchange’. IET is an
administrative approach to control pollution by providing fiscal incentives
to reduce emissions.
Carbon Emission Right (CER) is a type of financial derivative product that
gets its value from reduction in emission of greenhouse gas. The trade in
CERs can be on the spot or on forward basis. CCs create a market for reducing
emissions by giving a monetary value to the cost of polluting the air. Emissions
become an internal cost of doing business and are visible on the balance sheets.
CER can be acquired through self generation or through trading. Developing
countries like India can set up carbon reducing projects approved by UNFCCC.
When such projects go on stream, these generate CERs,. These CERs can be sold
through the climate exchange. The companies can also buy and then sell CERs
at profit. Carbon accounting implies that the country concerned has first
to measure the amount of CO2 released by various industries, determine the
limit of allowable emissions and then work out the system of generating CERs.
Presently, these are no accounting standards/or guidance notes for accounting
CERs which ICAI will have to work out.
As for the income-tax treatment. CERs are to be treated as ‘intangible
assets’ held with the registry of such rights. CERs acquired from others
will have to be accounted for on cost basis. The profit and loss on these
will have to be worked out with reference to sale price. Self generated CERs
will not appear in the balance sheets. Their existence will have to be disclosed
in the accounting policy in the published accounts.
As CERs are capital assets, the profit or loss arising on disposal of acquired
CERs will have to be disclosed on that basis. If these are held for more than
36 months, these will have to be treated as ‘long term capital assets’
and taxed on that basis. If self generated. CERs are sold, there will be no
liability for tax as these will have no cost.
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