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I-T department to monitor non-payment of tax
June, 25th 2010

Corporate earnings from trading in certified emission reduction or carbon credits has caught the eyes of income-tax department. Tax authorities plan to closely look at companies found active in carbon trading after finding non-payment of taxes on such earnings.

The issue was flagged at the recent conference of the chief commissioners and director generals of income-tax, a department official said.

A scrutiny of data filed by a number of listed companies revealed that many of them were not including proceeds from the sale of carbon credits in their income while calculation income-tax liability.

Field officers are expected to look into such cases of more closely. Though, tax authorities are gunning for companies for non-payment of taxes, lack of clarity on treatment of carbon credits is also an issue. Industry has for sometime lobbied for clarity on tax treatment of carbon credits. Presently, there is no clear definition in the tax laws about treatment of carbon credits.

They can both be accounted for as capital assets or goods. Industry has pitched for treating them as capital assets and further exempting them from capital gains tax. If treated as goods the income generated from their trading is treated as business income attracting 30% corporate tax.

The tax treatment of receipts from sale of CERs will very much be driven by whether CERs are goods or intangible assets which is currently a grey area. The ICAIs exposure draft proposes to consider CERs as intangible assets but to be accounted for as inventories and that could be a possible reference point, said Amitabh Singh, partner, Ernst & Young.

Under the Kyoto Protocol, companies from developing countries earn certified emission reduction (CER) or a carbon credit for each tonne of carbon dioxide emission they avoid. These carbon credits can be sold to companies or governments in developed countries that are under mandatory obligation to reduce carbon gas emissions.

The buyers can then offset their own targets against the CERs they purchase from companies in developing countries under the UNs Clean Development Mechanism or CDM. Trading in CERs is a growing area that has generated huge interest in the countrys corporate sector.

According to estimates, the industry has already invested close to Rs 60,000 crore into projects that will generate more than four crore carbon credits by the end of 2012. A World Bank study has pegged the total global market size for carbon credits at $10 billion.

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