Carbon Credit Accounting & Taxation: A Beginner’s Guide for Indian Businesses

Indian businesses increasingly embrace sustainability. Carbon credits are vital tools for environmental responsibility. They also offer a potential new revenue stream. But how do you account for them? What are their tax implications in India for Assessment Year (AY) 2025-26? This guide will demystify Carbon Credit Accounting & Taxation. It offers a clear roadmap for SMEs and startups navigating this evolving landscape.

What Exactly Are Carbon Credits?

A carbon credit, or carbon offset, is a measurable permit. It allows one tonne of carbon dioxide equivalent (CO2e) emissions. Industries get these permits. Their primary purpose is to incentivize projects. These projects reduce greenhouse gas (GHG) emissions. Entities cut emissions below a set level. They then generate credits. They sell these credits to entities exceeding emission limits. This creates a market for climate action.

Types of Carbon Credits in Focus

The carbon credit market operates in two main spheres:

• Compliance Market: Regulations mandate this market. Companies must meet specific emission reduction targets. In India, Energy Saving Certificates (ESCs) are an example. These are now ECRCs (Energy Consumption Reduction Certificates). They fall under the Perform, Achieve and Trade (PAT) scheme. Industries exceeding efficiency targets earn ECRCs. They can trade these.
• Voluntary Market: Companies or individuals voluntarily buy carbon credits here. They offset their carbon footprint. This often supports Corporate Social Responsibility (CSR) or ESG initiatives. We call these Voluntary Emission Reductions (VERs). Historically, Certified Emission Reductions (CERs) came from the Kyoto Protocol’s Clean Development Mechanism (CDM). They are now less common.

Understanding the Accounting Treatment of Carbon Credits

Carbon credit accounting depends on their purpose. Are they for compliance? For trading? Or did the entity generate them? Indian Accounting Standards (Ind AS/AS) do not yet directly address carbon credits. However, general principles guide Carbon Credit Accounting & Taxation:

• When Purchased:
  • As an Intangible Asset: A business buys carbon credits. It intends to use them later. They will offset its own emissions or ensure long-term compliance. You recognize them as an intangible asset. They go on the balance sheet. (Refer to principles of AS 26 / Ind AS 38).
  • As an Expense: Businesses purchase and use credits immediately. They meet a current compliance obligation. Or they treat them as inventory for trading. Then they expense them in the consumption period. Or they recognize them as inventory. (Refer to AS 2 / Ind AS 2).
• When Generated/Sold:
  • A company undertakes a project. It reduces emissions. It generates carbon credits. When it sells these credits, it recognizes them as revenue. Record the income when you transfer credit control to the buyer.
  • Illustrative Scenario: A manufacturing unit invests in renewable energy. This significantly cuts its carbon footprint. Verified excess emission reductions become tradable carbon credits. When the company sells these credits, it recognizes the proceeds as business income.

Tax Implications of Carbon Credits in India (AY 2025-26)

India’s tax landscape for Carbon Credit Accounting & Taxation still develops. Here’s the current understanding for AY 2025-26:

• Income Tax:
  • Taxability of Income from Sale: Income from selling carbon credits is usually Business Income. This falls under the Income Tax Act, 1961. This applies whether you generate or trade the credits. The Central Board of Direct Taxes (CBDT) confirmed this earlier.
  • Deductibility of Purchase Cost: You purchase carbon credits for business purposes. This includes meeting compliance or trading. You can typically claim their cost as a business expenditure. This adheres to relevant Income Tax Act provisions.
• GST (Goods and Services Tax):
  • Classification: Carbon credit classification under GST has been debated. In practice, we often treat them as ‘goods’ for GST purposes. However, specific clarity still develops.
  • Applicability of GST: GST generally applies to carbon credit sales and purchases. The specific GST rate depends on their classification.
  • Reverse Charge Mechanism: In certain cases, the reverse charge mechanism may apply. Here, the recipient pays the GST. This depends on the transaction’s nature and parties involved.

Tax treatment of carbon credits evolves. Specific rulings or clarifications from tax authorities may emerge. Stay updated.

Navigating India’s Carbon Market Landscape

India actively develops its domestic carbon market. The Ministry of Power oversees the ECRC trading mechanism. The Bureau of Energy Efficiency (BEE) also plays a role. Businesses in the compliance market must understand these regulatory bodies and frameworks.

Tips for Effective Carbon Credit Management

• Accurate Record-Keeping: Keep meticulous records. Track all carbon credit transactions. This includes acquisition, generation, usage, and sale.
• Regular Emission Assessment: Implement robust systems. Accurately measure and monitor your organization’s GHG emissions.
• Understanding Market Dynamics: Stay informed about demand, supply, and pricing trends. Monitor both compliance and voluntary carbon markets.
• Seeking Expert Advice: Carbon Credit Accounting & Taxation is complex. It also evolves. We highly recommend engaging specialized tax and accounting professionals.

Navigating Carbon Credit Accounting & Taxation demands specialized knowledge. For expert guidance on ESG compliance, carbon credit strategies, or corporate tax matters, contact CA Sweta Makwana & Associates today. As trusted tax advisors and a leading CA in Mumbai, our firm helps SMEs and startups. We integrate sustainability with sound financial practices.

Explore our dedicated ESG Advisory Services and Corporate Tax Compliance. Understand how CA Sweta Makwana & Associates, your compliance specialists for SMEs, startups & NRIs, can support your business’s sustainable growth.