GST on Environment taxes-A study on the Indian carbon tax & implications for GST

WHAT IS CARBON TAX?

A carbon tax is a fee for making users of fossil fuels pay for climate damage their fuel use imposes by releasing carbon dioxide into the atmosphere and motivating switches to clean energy. India introduced a nationwide carbon tax in 2010, which is currently Rs.400/tonne.

TAXABILITY OF CARBON CREDITS UNDER INDIAN DIRECT TAX LAWS (INCOME TAX)

With effect from 1st April 2018, Section 115BBG of the Income-tax Act has been inserted. The provision explicitly provides that the income from the transfer of UNFCCC-validated carbon credits is taxable at the rate of ten (10) percent. Also, no deduction in respect of any expenditure or allowance is allowed under this section.

TAXABILITY OF CARBON CREDITS UNDER INDIAN INDIRECT TAX LAWS(GST)

The Central Government vide Notification No. S.O.3068(E) dated September 27, 2016, notified carbon credits to be treated as goods (commodity derivatives) for the purposes of clause (bc) of section 2 of the Securities Contract (Regulation) Act.

CLARIFICATION

The Central Government issued a clarification vide Circular No. 34/8/2018-GST dated 01.03.2018 to clarify that priority sector lending certificates (PSLCs) are akin to renewable energy certificates (RECs) and they are not securities and therefore subject to 18% GST under the residual head.

It is important to note that carbon credits, in essence, are similar to the RECs. Another Circular No. 46/20/2018-GST dated 06.06.2018 clarified that RECs, PSLCs, etc. are classified under heading 4907 and will accordingly attract GST @ 12 % instead of 18% under the residual head.8/2021-Central Tax (Rate) dated 30.09. 2021 has clarified that the applicable GST rate for Heading 4907 is now 18% w.e.f 1st October 2021.

ADVANTAGES:

• Makers polluters pay the external cost of carbon emission
• Revenues can be spent on mitigating the effects of pollution
• Encourages firms and consumers to look for alternatives. Eg; Solar power

DISADVANTAGES

• May encourage tax evasion
• Businesses claim higher taxes can discourage investment and economic growth.
• Firms may shift production to countries where less carbon tax

 

Ganesh Shet SRO0714734