Revenue from sale of carbon credits not taxable

As per a recent ruling by Andhra Pradesh High Court, the revenue accrued on account of sale of carbon credits is “not taxable”. The judgement came in a case between The commissioner of Income Tax, Hyderabad vs My Home Power Limited (a company involved in process of biomass based power generation). The later had sold carbon credits to an Irish company and did not offer the receipts for taxation after claiming losses.

After hearing the case in detail, the court was of the view that carbon credits were not generated or created due to carrying on business but it accrued due to “world concern”. It said –

“The consideration received on account of carbon credits could not be considered as income, as carbon credit is not an offshoot of business but an offshoot of environmental concerns. No asset was generated in the course of business but it was generated due to environmental concerns. Credit for reducing carbon emission or greenhouse effect could be transferred to another party in need of reduction of carbon emission. It did not increase profit in any manner and did not need any expenses. It was a nature of entitlement to reduce carbon emission but there was no cost of acquisition or cost of production to get this entitlement. Carbon credit was not in the nature of profit or in the nature of income and it could not be subjected to tax in any manner under any head of income. It was not liable for tax in terms of sections 2(24), 28, 45 and 56 of the Income-tax Act, 1961. Hence, carbon credit was held to be an entitlement or accretion of capital and hence income earned on sale of these credits was capital receipt.”

REC vs CDM Mechanism

The below analysis was covered in a story by Bloomberg. You can read that article here.

 

After the launch of Renewable Certificate Mechanism (REC) in India, a frequent question in the minds of project developers is the comparison between Clean Development Mechanism (CDM) and REC mechanism. The below section covers some of the questions regarding the eligibility for CDM and REC, and the relative benefits under both mechanisms.

Q: Is a project eligible for REC benefit if it is already availing of CDM benefit?
A: The REC and CDM mechanisms are independent of each other. REC is a national mechanism which is focused on renewable energy generation whereas CDM is an international mechanism which is focused on Green House gas abatement.
Nowhere in its regulations the CERC has specified that availing of CDM benefit will disqualify a RE generator from accessing REC markets. Further, the CERC has clarified that “REC and CDM are different mechanisms” (Statement of Objects and Reasons dated January 14, 2010).

Q: Is the project eligible for CDM benefit if it also avails the REC benefit?
A: As mentioned above, the REC and CDM mechanisms are independent of each other, and from the CERC’s perspective, can co-exist. However, one of the fundamental aspects of eligibility for carbon credits in the “Additionality” criterion*. If the additional benefit of RECs is considered (even at a minimum of Rs 1.5/unit), it is likely that several projects that meet the additionality criterion under CDM without REC, are likely to not meet the criterion in the future when REC benefit is included.
However, for every project an analysis will have to be done on a case-by-case basis. For example, a project that meets the additionality criterion based on the feed-in tariff of a state, may still meet the criterion if the APPC + REC price is considered in one state, but not in another.

Q: How does the benefit under CDM and REC mechanism compare?
A: The benefit needs to be compared under various parameters:

Options REC CDM
Monetary Benefits More Less
Access ( Profit/Cost ) Less time More time
Certainty of Revenue Depends on enforcement of the mechanism Reasonable


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Renewable Energy Certificates-An Introduction

As part of the National Mission on Climate Change, a policy to implement Renewable Purchase Obligation (RPO) is being put in place by the Central Electricity Regulatory Commission. The new policy will require Electricity Distributors, large Captive Consumers and large Open Access Consumers to purchase a certain percentage of their total electricity needs from renewable sources.

Renewable Energy Certificates: Similar to Carbon Credits
Similar to the Carbon Credit Market, a market for meeting the RPO requirements is in the process of being set up in India. Just like at the international level, companies that do not meet their emission reduction targets can purchase Carbon Credits from the market, similarly, Electricity Distributors in India that do not buy the percentage of renewable energy required by law, will have the option to fulfil their obligation by purchase of Renewable Energy Certificates (REC). RECs will be traded at power exchanges in India.

Additional Source of Revenue
For renewable energy producers – wind farms owners, biomass power plants, small hydro projects, etc, RECs present a very valuable Read more…

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