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Applicability of GST on Carbon Credits

Updated on:  

08 min read

Carbon credits play a vital role in environmental protection, and at the same time, it secures the financial health of the companies trading in it. In this article, we will discuss the applicability of GST on carbon credits.

What is a carbon credit?

The concept of carbon credits was introduced to reduce the outflow of greenhouse gases in the atmosphere. A carbon credit is a tradable permit or certificate, which allows a company to emit a predetermined amount of carbon dioxide or other greenhouse gas into the atmosphere.

If a company exceeds the particular limit, it is penalised. At the same time, excess credits can be sold to other companies. 

Understanding carbon emission targets and carbon credits

Companies need to purchase carbon credits to continue to emit greenhouse gases up to a specific limit. The respective government sets this limit, but typically one carbon credit allows one tonne of carbon dioxide or equivalent greenhouse gas.

However, companies are allowed to sell their excess credits. Thus, companies can make money by saving and reselling some of their emission allowances. The intention is to bring down the number of credits over time by pushing companies to find innovative means to reduce greenhouse gas emissions.

Carbon credit trading

In simple terms, trading of carbon credits means buying and selling the right to emit carbon dioxide or other greenhouse gases in the atmosphere. Buying carbon credits means buying the right to burn more carbon dioxide in the atmosphere. Selling carbon credits means selling the right to burn more carbon dioxide in the atmosphere.

Applicability of GST on carbon credit trading in India

The Indian government has not provided any specific clarification with regard to the applicability of GST on carbon credits. But, clarification can be obtained from Circular no. 34/08/2018- GST dated 1st March 2018, which is related to the levy of GST on Priority Sector Lending Certificates (PSLCs).

As per this notification, these certificates can be considered as goods. These certificates are similar to freely tradeable duty scrips or renewable energy certificates, which are liable to VAT and accordingly, GST is also applicable on the same at 18%.

Carbon credits are similar to Priority Sector Lending Certificates. Carbon credits have their market and are freely tradeable. Even though carbon credits trading is not considered in the above clarification, it can be linked to the above clarification. Thus we can presume that the trading of carbon credits is taxable under GST.

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