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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.