794
GST
Export of Carbon Credit : Procedural disconnect in
Refund Application
Talks on Carbon credits
have recently gained
more importance as our
Prime Minister Shri
Narendra Modi has
set an ambitious target
of making India a net
zero emitter by 2070.
To achieve net zero
carbon emission target,
Indian government
has introduced and
passed the Energy
Conversation
(Amendment) Bill, 2022
in Lok Sabha on 8th
August 2022. Currently,
Indian companies are
exporting UNFCCC-
approved carbon credits
which are sold through
third-party regulator
such as CDM formed
under UNFCCC. On
analysing the status
of Carbon Credits as
a supply of goods or
services, scale is tilting
towards the arguments
that it’s supply should
be considered as supply
of goods. But there lies
a procedural disconnect
while filing refund
application as supply
of such certificates
is taking place
electronically.
82 THE CHARTERED ACCOUNTANT JANUARY 2023
CA. Shruti Singhal
Author is member of the Institute. She may be reached at
shrutisinghal28@yahoo.com and eboard@icai.in
O
n 1st November 2021, the Prime Minister while delivering
the National Statement at the COP26 Summit, in Glasgow,
Scotland, set an ambitious target for India to attain net zero
carbon emission by 2070.
This was a big news getting high publicity. Let us look at the brief
history of this development and try to understand the key words
which are of importance before we proceed to discuss the main
topic of procedural disconnect during filing refund application on
export of Carbon Credit.
Key Words
a) United Nations Framework Convention on Climate Change
(UNFCCC) – With 197 Parties, the UNFCCC has near universal
membership and is the parent treaty of the 2015 Paris Climate
Change Agreement. The UNFCCC is also the parent treaty of the
1997 Kyoto Protocol. The ultimate objective of all agreements under
the UNFCCC is to stabilise greenhouse gas concentrations in the
atmosphere at a level that will prevent dangerous human interference
with the climate system, in a time frame which allows ecosystems to
adapt naturally and enables sustainable development.1
b) Kyoto Protocol - The Kyoto Protocol operationalises the United
Nations Framework Convention on Climate Change (UNFCCC) by
committing industrialised countries and economies in transition to
limit and reduce greenhouse gases (GHG) emissions in accordance
with agreed individual targets.2
a. The Kyoto Protocol was adopted in Kyoto, Japan on 11
December 1997. Owing to a complex ratification process, it
entered into force on 16 February 2005. Currently, there are
192 Parties to the Kyoto Protocol. Kyoto Protocol bounded
only industrialised nations to act.
c) Paris Climate Agreement – The main aim of the Paris Agreement
is to keep the global average temperature rise in this century well
below 2 degree Celsius and to drive efforts to limit the temperature
increase even further to 1.5 degrees Celsius above pre-industrial
levels.1 With the adoption of the Paris Agreement, most
countries in the world have committed to climate action.
d) Clean Development Mechanism (CDM) – The CDM was
developed under the Kyoto Protocol. The CDM allows emission-
reduction projects in developing countries to earn certified emission
reduction (CER) credits, each equivalent to one tonne of CO2. These
CERs can be traded and sold, and used by industrialised countries to
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 795

GST

meet a part of their emission core of these markets are not going to discuss the
reduction targets under the are termed as Certified future of trading in Carbon
Kyoto Protocol. Emission Reduction Credit Certificates through
(CER) credits. Carbon Credit Markets.
a. The mechanism
Currently, Indian companies
stimulates sustainable • Voluntary Markets are exporting UNFCCC-
development and emission - Voluntary markets approved carbon credits which
reductions, while giving are those in which are sold through third-party
industrialised countries companies and regulator such as CDM formed
some flexibility in how other entities like under UNFCCC.
they meet their emission government, NGOs,
reduction limitation etc. take measures to Let us look at the various
targets.3 reduce their carbon issues and discuss the possible
footprint as part of their solutions in current scenario
e) Carbon Credit – A
own initiatives as a part of trading of Carbon Credit
carbon credit is a tradable
of their CSR activities Certificates.
certificate stating the credits
or to improve their
earned by the holder of Difference between tradable
reputation, etc. The
the certificate. Each credit certificates and certificates
credits in these markets
is equivalent to 1 tonne of issued by Authorities?
are termed as Voluntary
CO2 emission-reduction.
Emission Reduction There are different types of
These carbon credits can
(VER) credits. certificates being issued by
be used towards meeting
Kyoto targets or used for various Authorities. All the
India was a signatory to
voluntary purposes. certificates issued are not
the Kyoto Protocol which
termed as tradable certificates.
bound only the industrialised
f) Carbon Markets –
nations to reduce greenhouse In the case of Venkatesh
Compliance & Voluntary
gases (GHG) emission and Automobiles, AAR Goa, the
Markets
it provided targets for only appellant was carrying out the
There are two types of the developed nations. Kyoto Pollution testing and issuing
carbon markets – the agreement was subsequently Pollution Under Control (PUC)
compliance market and the replaced by the Paris Certificate on payment of
voluntary market. Agreement whereby almost prescribed fees fixed by the
all the nations of the world Government. This issuance of
• Compliance Markets - committed to reduce the GHG certificate is supply of services
The compliance carbon emission. In 26th Conference of unlike the tradable certificates
markets are developed Parties at UNFCCC like Renewable
as part of a nation’s i.e. COP26, India Energy Certificates
obligation to cut their committed itself (RECs) and Priority
emission or bring it voluntarily to be net A carbon credit Sector Lending
under a defined gap. zero carbon emitter is a tradable Certificates (PSLCs)
The limit has been by 2070. To achieve certificate stating which are held by
set up through global net zero carbon the credits earned CBIC as per circular
treaties like Kyoto emission target, by the holder of no. 46/20/2018-
Protocol. Under this, Indian government
developed countries the certificate. Each GST, dt. 6th June,
has introduced and
that are signatory to credit is equivalent 2018 as goods.
passed the Energy
treaties like Kyoto Conversation to 1 tonne of CO2 Rate of GST
Protocol must take (Amendment) Bill, emission-reduction. on Tradable
steps to lower their 2022 in Lok Sabha Certificates
emissions. This can be on 8 August,
th
accomplished either Circular no.
2022. The bill seeks 46/20/2018-GST,
through imposing to establish Carbon Credit
carbon tax or setting dt. 6th June 2018 has further
Market in India to issue Carbon provided the rate of GST on
up a mandatory carbon Credit Certificates by Indian
market. The allowances Tradable certificates and duty
Government. Since this bill has paying scrips like MEIS, SEIS,
or permits that form the not become an Act till date, we etc.

www.icai.org THE CHARTERED ACCOUNTANT JANUARY 2023 83

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GST

Circular has also clarified that as neither supply of goods Whether Securities? – Let us
RECs, PSLCs are classifiable nor a supply of services read Section 2(h) of Securities
under following part of the as per Schedule III of the Contract (Regulation) Act, 1956
entry having heading 4907 and CGST Act, 2017 and thus (SCRA)(relevant portion only),
attracting 12% GST. – are outside the scope of
GST. Meaning thereby “securities” include –
“Stock, share or bond certificates that if CERs are termed as (i) shares, scrips, stocks, bonds,
and similar documents of title actionable claims, then it will debentures, debenture stock
[other than Duty Credit Scrips]”, be outside the scope of GST. or other marketable securities
Though duty paying scrips like c) It should be noted that of a like nature in or of any
MEIS, SEIS, etc. are classifiable both in erstwhile Sales incorporated company or other
under the same heading, it will Tax Laws and Excise body corporate;…..
attract Nil GST {under S. No. Laws, another element i.e. Analysts considering CERs as
122A of Notification Whether property securities are including CERs
No. 2/2017-Central is marketable was within the scope of “other
Tax (Rate) dated to be considered marketable securities of a like
28.06.2017, as The compliance while determining nature in or of any incorporated
amended vide carbon markets whether a property company or other body
Notification No. is goods or not. corporate” and stating that CERs
35/2017-Central are developed as
part of a nation’s Let us check these can be considered as securities.
Tax (Rate) dated
13.10.2017}. obligation to cut key elements one Also, to get judicial precedence
their emission or by one - for this argument, it is relevant
Whether Carbon to highlight here that renewable
Credits/Certified bring it under a Whether CERs are
defined gap. movable property? power companies have
Emission
moved to Delhi High Court
Reduction (CER) Concept of
credits will be contending that RECs fall under
Movability was the definition of securities,
termed as supply discussed in
of goods? arguing that “These scrips are
Municipal Corporation of traded on IEX (Indian Energy
a) Section 2(52) of CGST Greater Mumbai-1996-SC and
Exchange) and PXIL (Power
Act, 2017 defines goods “test of permanency” was laid
down which said – Exchange India Limited) and
and states that “goods” are electricity derivatives,” and
means every kind of movable (a) Whether the article is notices have been issued to the
property other than money movable to another place of relevant parties.4
and securities but includes use in the same condition; or
actionable claim, growing Whether Money?
crops, grass and things (b) Is it liable to be dismantled
attached to or forming part of and re-erected at another As per Section 2(75) of the
the land which are agreed to be place? CGST Act, 2017, “Money”
severed before supply or under means the Indian legal tender
If answer to the former is or any foreign currency, cheque,
a contract of supply; affirmative, it must be a promissory note, bill of exchange,
b) Key elements to be movable property. letter of credit, draft, pay order,
confirmed if a property is But if the answer to the latter traveller cheque, money order,
to be considered as goods is positive, then it would be postal or electronic remittance or
under the GST Act are treated as immovable property. any other instrument recognised
• It should be a movable by the Reserve Bank of India when
There is no doubt that
property certificates can be moved from used as a consideration to settle
one place to another in the same an obligation or exchange with
• It should not be money
condition. Thus, CERs will be Indian legal tender of another
or securities
termed as movable property. denomination but shall not include
• Actionable claims are any currency that is held for its
also good. Whether carbon credits can be numismatic value;
excluded from the definition
Note - Actionable claims, of goods altogether by treating Since CERs does not come
other than lottery, betting them as supply of securities or under any other instrument
and gambling are considered supply of money? recognised by the RBI which

84 THE CHARTERED ACCOUNTANT JANUARY 2023 www.icai.org


can be used as a consideration
to settle an obligation, thus
CERs cannot come within the
purview of Money.
Whether CERs can be
considered as actionable
claims?
Hon’ble Supreme Court in
the case of M/s Vikas Sales
Corporation (2) (1996) 4 SCC 433
while discussing whether REP
Licence can be covered under
Actionable claims, observed
that: “When these licences/scrips
are being bought and sold freely
in the market as goods and when
they have a value of their own
unrelated to the goods which can
be imported thereunder, it is idle to
contend that they are in the nature
of actionable claims. It was assumed
that actionable claims are not
transferable for value and that was
the difference between “actionable
claims” and those other goods
which are covered by the definition
of “goods” in the Sales of Goods
Act, 1930, and the sale tax laws.
The assumption was fallacious and
the conclusion in so far as it was
based on this erroneous perception,
equally wrong”.
Since CERs like REP Licences
are being brought and sold
freely in the market as goods
and have a value of their own
unrelated to any other goods,
thus it cannot be considered as
actionable claims.
Whether CERs are marketable?
In this respect, case laws of
honourable Supreme Court
and various high courts can be
read to analyse whether CERs
can be termed as marketable.
The courts have not discussed
whether CERs are marketable
but have discussed whether
other intangibles goods which
are similar to CERs like, for
example, copyright, patents,
REP Licence, etc. It is relevant
to read the judgement of the
www.icai.org
797
GST
Hon’ble Supreme Court in credit is also clearly “goods” within
the case of Tata Consultancy the meaning of the sales tax laws”.
Services vs. State of Andhra There is also a notification
Pradesh wherein, it was, inter under DVAT Act (Notification
alia, held that:- No. 256/CDVAT/2009/43
“A “goods” may be tangible dated 13-1-2010), which has
property or an intangible on. It discussed the levy of DVAT on
would become goods provided it has CERs and after discussing the
aforesaid mentioned rulings the
the attributes thereof having regard
to (a) its utility; (b) capable of being department has concluded in
the notification that the CERs
bought and sold and (c) capable
will be considered as goods and
of being transmitted, transferred, will be taxable under DVAT
delivered, stored and possessed. Act, 2004. The
If a software whether DVAT Act has been
customized or non- replaced by SGST
customized satisfies Since CERs does Act for all goods
these attributes, the
same would be goods”.
not come under any excluding alcoholic
other instrument liquor for human
Further, Hon’ble consumption and 5
recognised by petroleum products
Supreme Court the RBI which
i.e. Petroleum
in the case of can be used as a Crude, High Speed
Yash Overseas vs. consideration to Diesel, Motor Spirit
Commissioner of (commonly known
Sales Tax and Others
settle an obligation,
thus CERs cannot as Petrol), Natural
(Civil Appeal No. Gas and Aviation
2155 of 2000), while come within the
Turbine Fuel.
discussing whether purview of Money.
REP Licence was Considering all the
marketable or not, points discussed
held that: above we can
conclude that the
“REP licences had always a market. scale is tilting in the favour of
There were people willing to sell and the argument that sale of CERs
others willing to buy REP licences will be considered as supply of
at all times. Their innate value goods under the GST as there
coupled with free transferability is no judicial precedence to
made REP licences into a classify CERs and like tradable
marketable commodity. They were certificates as securities.
“goods” properly so called, having Export of Carbon Credits –
innate value and a ready market. Procedural Aspects
Under the Duty Entitlement Since at present Indian market
Passbook (DEPB) Scheme, an for exchange of carbon credits
exporter is eligible to claim credit is not operating, in Indian
as a specified percentage of the job scenario CERs can only be
value of exports made in freely exported to industrialised
countries.
convertible currency. The credit
is available against such export What are certified emission
products and at such rates as may reductions or CERs?
be specified by the Director General
Certified emission reductions or
of Foreign Trade by a public notice
CERs are electronic certificates
issued in this behalf. The DEPB is
issued for greenhouse gas emission
exactly the same as REP licence.
reductions from clean development
Like the REP licence, it has an
mechanism (CDM) project activities
innate value which makes it a
or programmes of activities (PoAs)
marketable commodity. The DEPB
THE CHARTERED ACCOUNTANT JANUARY 2023 85
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GST

in accordance with the CDM rules
and requirements. Each CER is
equivalent to one metric tonne of
carbon dioxide (CO2) avoided or
removed from the atmosphere.
The environmental benefit of
CERs can be claimed to offset or
compensate your own greenhouse
gas emissions, among other uses.5
What does “voluntary
cancellation” or “cancellation”
of CERs mean?
CERs are recorded and tracked
in electronic databases know as
emissions registries. The CERs
offered on this platform are recorded
and tracked in the clean development
mechanism (CDM) registry
operated by the UN Climate Change
secretariat. Voluntary cancellation,
also referred to as cancellation, is
the process in the CDM registry
by which CERs are taken out of
circulation, preventing any further
use. It is similar to destroying them
or marking them so they can no
longer be used.5
Certified emission reductions or rule (2) of Rule 89 of CGST
CERs are electronic certificates Rules, 2017 suitably like it is
issued for greenhouse gas emission recently done for export of
reductions from clean development electricity through Notification
mechanism (CDM) project activities No. 14/2022-CT, dated 5-7-2022
or programmes of activities (PoAs) and provide alternate supporting
in accordance with the CDM rules document to substantiate the
and requirements. Each CER is refund claim while filing refund
equivalent to one metric tonne of application.
carbon dioxide (CO2e) avoided or
removed from the atmosphere.5 Notes –
1. https://unfccc.int/news/
The situation as it stands is that cop26-reaches-consensus-on-
since trade of these certificates is key-actions-to-address-climate-
done over the internet, it does not change
provide appropriate supporting 2. https://unfccc.int/kyoto_
documents to shipping bill like protocol
courier slip, bill of lading or an
3. https://cdm.unfccc.int/about/
Airway bill but the export of index.html
CERs is considered as export of
goods (as per aforesaid discussed 4. https://www.business-
judicial precedence), thus there is standard.com/article/
economy-policy/12-gst-
a procedural disconnect when we on-recs-renewable-power-
analyse the export of CERs while companies-move-delhi-high-
processing refund application court-119041700080_1.html
under GST.
5. https://offset.
Author suggests that the climateneutralnow.org/faq
government may amend sub-  ¢¢¢

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