Section 115BBG Income Tax - Carbon Credit

A carbon credit refers to a permit which allows a country or organization to produce a certain amount of carbon emissions. A carbon credit can be traded if the full allowance is not used. A carbon credit is a generic term for any tradable certificate or permits representing the right to emit one tonne of carbon dioxide or the mass of another greenhouse gas (GHG) with a carbon dioxide equivalent (tCO2e) equivalent to one tonne of carbon dioxide. A carbon credit can be defined as a certificate showing that a government or company has paid to have a certain amount of carbon dioxide removed from the environment. The goal is to allow market mechanisms to drive industrial and commercial processes in the direction of low emissions or less carbon-intensive approaches than those used when there is no cost to emitting carbon dioxide and other GHGs into the atmosphere. Since GHG mitigation projects generate credits, this approach can be used to finance carbon reduction schemes between trading partners and around the world. The reduction in emissions entitles the entity to a credit in the form of Certificate Emission Reduction. Certificate Emission Reduction can be traded in order to allow another entity to fulfil its carbon credit limit so that it can overcome an unfavourable position on carbon credits. With effect from 01.04.2018, the Government of India has allowed a concessionary tax rate of ten per cent for taxpayers who are earning an income by transfer of carbon credits.

Section 115BBG of Income Tax

New section 115BBG has been inserted under the Income Tax Act effective from 1st April 2018, which contains 
the provisions of how income tax would be levied on income from transfer of carbon credits. 
The provisions of section 115BBG are given below:
115BBG (1) Where the total income of an assessee includes any income by way of transfer of carbon credits, 
the income-tax payable shall be the aggregate of-

(a) the amount of income-tax calculated on the income by way of transfer of carbon credits, 
at the rate of ten per cent; and

(b) the amount of income-tax with which the assessee would have been chargeable had his total income been 
reduced by the amount of income referred to in clause (a).

(2) Notwithstanding anything contained in this Act, no deduction in respect of any expenditure or allowance 
shall be allowed to the assessee under any provision of this Act in computing his income referred to 
in clause (a) of subsection (1).
Explanation.- For the purposes of this section 'carbon credit' in respect of one unit shall mean 
reduction of one tonne of carbon dioxide emissions or emissions of its equivalent gases which is 
validated by the United Nations Framework on Climate Change and which can be traded in the market 
at its prevailing market price.

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Frequently Asked Questions

Common questions about Section 115BBG: Taxation on Carbon Credits in India.

A carbon credit is a tradable certificate or permit that represents the right to emit one tonne of carbon dioxide or an equivalent amount of another greenhouse gas. It is a market-based mechanism aimed at reducing carbon emissions by allowing entities to trade these credits.

The carbon credit trading system works by setting a limit on the total amount of greenhouse gas emissions allowed for a particular country or organization. Those who emit less than their allocated limit can sell their excess carbon credits to entities that have exceeded their emission limits, allowing the latter to offset their emissions by purchasing these credits.

Section 115BBG was introduced in the Income Tax Act from April 1, 2018, to provide a concessionary tax rate of 10% for taxpayers earning income by transferring carbon credits. This move aims to encourage participation in the carbon credit market and promote environmentally sustainable practices.

Under Section 115BBG, income derived from the transfer of carbon credits is taxed at a concessional rate of 10%. The taxpayer's remaining income is taxed at the applicable regular income tax rates.

No, Section 115BBG(2) clearly states that no deduction or allowance shall be allowed to the assessee under any provision of the Income Tax Act while computing income from the transfer of carbon credits.

As per the explanation provided in Section 115BBG, a 'carbon credit' in respect of one unit means the reduction of one tonne of carbon dioxide emissions or emissions of its equivalent gases, which is validated by the United Nations Framework on Climate Change and can be traded in the market at its prevailing price.

The article does not provide specific information regarding the carry forward of carbon credits. However, in general, carbon credits are tradable commodities, and if not traded in a particular year, they can typically be carried forward and traded in subsequent years, subject to the applicable rules and regulations.

The article does not specify any restrictions on the type of taxpayers eligible for the concessional tax rate under Section 115BBG. Therefore, it can be assumed that the 10% tax rate on income from the transfer of carbon credits is applicable to all taxpayers, including individuals, companies, and other entities.

According to the explanation in Section 115BBG, for a carbon credit to be valid and tradable, it must be validated by the United Nations Framework on Climate Change. This validation process ensures that the claimed reduction in carbon emissions or equivalent gases is legitimate and meets the required standards.

No, the concessional tax rate of 10% under Section 115BBG is specifically applicable to income derived from the transfer of carbon credits. The article does not mention any other types of environmental credits being covered under this provision.