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Carbon Credit

Ankit (...) (74 Points)

30 October 2008

I would like to know how is the accounting done for Carbon Credits

When to recognise carbon credit & when u sell them to some other company...

Thank u

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8 Replies

CA. Dashrath Maheshwari (TaXpert) (15103 Points)
Replied 30 October 2008

Carbon credits are a key component of national and international emissions trading schemes that have been implemented to mitigate global warming. They provide a way to reduce greenhouse effect emissions on an industrial scale by capping total annual emissions and letting the market assign a monetary value to any shortfall through trading. Credits can be exchanged between businesses or bought and sold in international markets at the prevailing market price. Credits can be used to finance carbon reduction schemes between trading partners and around the world.

There are also many companies that sell carbon credits to commercial and individual customers who are interested in lowering their carbon footprint on a voluntary basis. These carbon offsetters purchase the credits from an investment fund or a carbon development company that has aggregated the credits from individual projects. The quality of the credits is based in part on the validation process and sophistication of the fund or development company that acted as the sponsor to the carbon project. This is reflected in their price; voluntary units typically have less value than the units sold through the rigorously-validated Clean Development Mechanism.

**DM

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CA. Dashrath Maheshwari (TaXpert) (15103 Points)
Replied 30 October 2008

Some experts, having admitted that there are presently no guidelines/standards for accounting of Carbon Credits, have suggested that they be accounted as Government Grant. There logic is based on the definition of the term ‘Government’ prescribed in para 3.1 of AS-12, which reads: “Government refers to government, government agencies and similar bodies, whether local, national or international.” The logic forwarded appears to be misplaced, as in case of financial transactions arising out of carbon credit, monetary consideration will not flow from any government or government agency. In total gambit, UNFCC CDM registry acts as a Demat banker recognising CER credits and keeping an account of it. There is no grant at all from any agency. Further, as soon as Carbon Credits are accounted as Government Grants, Accounting Standard-9 ‘revenue recognition’ will cease to operate, leading to other accounting and taxation complications.

**dm

CA. Dashrath Maheshwari (TaXpert) (15103 Points)
Replied 30 October 2008

To determine whether VAT or service tax would be applicable, it is relevant to determine whether CERs are classifiable as goods or services. At present, indirect tax legislation does not provide guidelines for such treatment and jurisprudence on this issue is yet to evolve. In the event of CERs being taxed as goods, it is felt that they should be accorded the same treatment as electricity for VAT purposes, that is, either CERs be excluded from the purview of VAT or be specified in the schedule of exempted goods.

CERs, if made liable to indirect taxes, may adversely impact the carbon credit-trading boom in India. Indirect taxes embedded in an arrangement involving the sale or provision of services in respect of CERs would thus influence pricing and may make India a less attractive destination for carbon credit shopping. The government is expected to grant tax sops on carbon credit trading with a view to ensure its global commitment to the reduction of carbon emissions.

Lack of clarity on the treatment of CERs for indirect tax purposes exposes companies engaged in projects generating carbon credits to the threat of significant tax demands. The past year saw the Institute for Solid Waste Research & Ecological Balance urge the Centre to exempt carbon credit earnings from income tax, as well as service tax, and to issue separate orders to dispel all doubts on this issue. Various sectors had specifically sought clarification on the treatment of CERs in their Budget wish list. However, the Budget 2008 merely makes a passing reference to a trading platform for carbon emissions and does not shed any light on the aspect of taxation of CERs.

The Institute of Chartered Accountants of India (ICAI) is currently working on accounting norms for carbon credits. According to ICAI, companies who earn revenue by selling carbon credits will have to make their financial statements under the new norms from April 1. However, the new accounting norm on this issue is yet to be notified by ICAI. It, thus, has to be seen whether CERs are classified as a tradable commodity under the accounting norm.