The Finance Bill proposes to levy a tax of 10% on income earned on transfer of carbon credits. Such a tax will be levied on the gross income, without allowing for any deductions.
According to the explanatory memorandum to the Finance Bill, the income tax (IT) department has been treating the income earned on transfer of carbon credits as business income subject to tax at the rate of 30%. In this context, it seems like a favourable position on the face of it, but it is a mixed bag, say tax experts and industry specialists. Samir Kanabar, tax partner at EY, points out, "There have been several favourable cases at the tax tri bunal and high court levels, such as by the Karnataka High Court in the case of Subhash Kabini Power, where revenue on sale of carbon credit was treated as a `capital receipt' not subject to any tax. These now stand overturned." Direct taxes code had recommended that income from sale of carbon credits be treated as business income. Then the tax levy of 10% may be considered as beneficial, adds Kanabar.