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TMI BlogLegal and Practical Perspectives on the Taxation of Carbon Credit Transfers : Clause 194 (Table: S. No. 3) of the Income Tax Bill, 2025 Vs. Section 115BBG of the Income-tax Act, 1961X X X X Extracts X X X X X X X X Extracts X X X X ..... income arising from the transfer of carbon credits. This provision is to be analyzed in detail and compared with the existing Section 115BBG of the Income-tax Act, 1961, which currently governs the taxation of such income. The analysis aims to provide a comprehensive understanding of the legislative intent, detailed breakdown of the provision, its practical implications, and a comparative study highlighting the similarities, differences, and potential implications for taxpayers and the administration. Objective and Purpose The primary objective of both Clause 194 (Table: S. No. 3) of the Income Tax Bill, 2025, and Section 115BBG of the Income-tax Act, 1961, is to provide a clear, concessional, and uniform tax regime for income derived fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of consideration received from the sale, assignment, or transfer of carbon credits. * Rate of Tax: 10% - The income is taxed at a flat rate, irrespective of the slab rates applicable to the assessee's other income. * Conditions: "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 column C." The provision requires the computation of tax in two steps: * Calculate tax on the income from transfer of carbon credits at 10%. * Calculate tax on the remaining total income (excluding the carbon credit income) as per the normal provisions. * The aggregate of the above two amounts shall be the tax payable. 2. Definition of Carbon Cr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... definition. Practical Implications 1. Impact on Taxpayers * Universality: All persons, whether resident or non-resident, are covered, provided the income arises from the transfer of carbon credits. * Tax Certainty: The fixed 10% rate provides certainty, allowing taxpayers to plan and structure their transactions without fear of variable or progressive taxation. * Prohibition of Deductions: The inability to claim any deduction may, in some cases, result in a higher effective tax burden, especially for those incurring significant costs in generating carbon credits. * Compliance Simplicity: The straightforward computation method and lack of allowance for deductions simplify compliance and reduce the scope for disputes. 2. Administra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... withstanding 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 sub-section (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 market at its prevailing market price. A side-by-side comparison reveals striking similarities, with only minor drafting differences. 2. Points of Similarity * Scope of Applicability: Both provisions apply to "any person," coveri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ew Bill may be accompanied by new rules or clarifications that are not present in the existing Act, though the substantive law for carbon credits remains unchanged. 4. Implications of the Transition The transition from Section 115BBG to Clause 194 (Table: S. No. 3) is largely a matter of legislative reorganization rather than substantive change. The intent appears to be to consolidate the special tax regimes into a single provision for improved clarity and administration. For taxpayers, the practical impact should be minimal, as the computation, rate, scope, and definitions remain the same. 5. Potential Ambiguities and Issues Both provisions are clear in their drafting, but potential issues may arise in the following areas: * Validati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llowed Aggregation Tax on carbon credit income at 10% + tax on balance income as per rates applicable Tax on carbon credit income at 10% + tax on balance income as per rates applicable Definition of Carbon Credit Reduction of one tonne of CO2 or equivalent, validated by UNFCCC, tradable at market price Reduction of one tonne of CO2 or equivalent, validated by UNFCCC, tradable at market price Set-off/Carry forward of Losses Silent Silent Characterization (Capital/Business) Not specified; self-contained code Not specified; self-contained code Deduction for Cost of Generation Not allowed Not allowed Cross-border Transactions Not addressed Not addressed Policy and Global Context The Indian regime is br ..... X X X X Extracts X X X X X X X X Extracts X X X X
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