Export of Carbon Credit : Procedural disconnect in Refund Application

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

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 meet a part of their emission reduction targets under the Kyoto Protocol.

e) Carbon Credit

A carbon credit is a tradable certificate stating the credits earned by the holder of the certificate. Each credit is equivalent to 1 tonne of CO2 emission-reduction. These carbon credits can be used towards meeting Kyoto targets or used for voluntary purposes.

f) Carbon Markets – Compliance & Voluntary Markets

There are two types of carbon markets – the compliance market and the voluntary market.

Regulatory/Pollution Certificates (Supply of Services):

In the case of Venkatesh Automobiles, AAR Goa, the appellant was carrying out the Pollution testing and issuing Pollution Under Control (PUC) Certificate on payment of prescribed fees fixed by the Government. This issuance of certificate is supply of services unlike the tradable certificates like Renewable Energy Certificates (RECs) and Priority Sector Lending Certificates (PSLCs) which are held by CBIC as per circular no. 46/20/2018-GST, dt. 6th June, 2018 as goods.

Though duty paying scrips like MEIS, SEIS, etc. are classifiable under the same heading, it will attract Nil GST {under S. No. 122A of Notification No. 2/2017-Central Tax (Rate) dated 28.06.2017, as amended vide Notification No. 35/2017-Central Tax (Rate) dated 13.10.2017}.

a) Statutory Definition under Section 2(52) of the CGST Act, 2017:

“goods” means every kind of movable property other than money and securities but includes actionable claim, growing crops, grass and things attached to or forming part of the land which are agreed to be severed before supply or under a contract of supply;

b) Key elements to be confirmed if a property is to be considered as goods under the GST Act are:

• It should be a movable property
• It should not be money or securities
• Actionable claims are also good.

c) Marketability in Sales Tax & Excise Jurisprudence:

It should be noted that both in erstwhile Sales Tax Laws and Excise Laws, another element i.e. Whether property is marketable was to be considered while determining whether a property is goods or not.

(a) Whether the article is movable to another place of use in the same condition; or
(b) Is it liable to be dismantled and re-erected at another place?

There is no doubt that certificates can be moved from one place to another in the same condition. Thus, CERs will be termed as movable property.

Whether Securities?

Let us read Section 2(h) of Securities Contract (Regulation) Act, 1956 (SCRA)(relevant portion only),

“securities” include –
(i) shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company or other body corporate;…..

Analysts considering CERs as securities are including CERs within the scope of “other marketable securities of a like nature in or of any incorporated company or other body corporate” and stating that CERs can be considered as securities.

Also, to get judicial precedence for this argument, it is relevant to highlight here that renewable power companies have moved to Delhi High Court contending that RECs fall under the definition of securities, arguing that “These scrips are traded on IEX (Indian Energy Exchange) and PXIL (Power Exchange India Limited) and are electricity derivatives,” and notices have been issued to the relevant parties.⁴

Whether Money?

As per Section 2(75) of the CGST Act, 2017, “Money” means the Indian legal tender or any foreign currency, cheque, promissory note, bill of exchange, letter of credit, draft, pay order, traveller cheque, money order, postal or electronic remittance or any other instrument recognised by the Reserve Bank of India when used as a consideration to settle an obligation or exchange with Indian legal tender of another denomination but shall not include any currency that is held for its numismatic value;

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.

Notification under DVAT Act (Notification No. 256/CDVAT/2009/43 dated 13-1-2010):
Discussed the levy of DVAT on CERs and after discussing the aforesaid mentioned rulings the department has concluded in the notification that the CERs will be considered as goods and will be taxable under DVAT Act, 2004. The DVAT Act has been replaced by SGST Act for all goods excluding alcoholic liquor for human consumption and 5 petroleum products i.e. Petroleum Crude, High Speed Diesel, Motor Spirit (commonly known as Petrol), Natural Gas and Aviation Turbine Fuel.

Conclusion on Classification: Considering all the points discussed above we can conclude that the scale is tilting in the favour of the argument that sale of CERs will be considered as supply of goods under the GST as there is no judicial precedence to classify CERs and like tradable certificates as securities.

What are certified emission reductions or CERs?

Certified emission reductions or CERs are electronic certificates issued for greenhouse gas emission reductions from clean development mechanism (CDM) project activities or programmes of activities (PoAs) 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 CERs are electronic certificates issued for greenhouse gas emission reductions from clean development mechanism (CDM) project activities or programmes of activities (PoAs) in accordance with the CDM rules and requirements. Each CER is equivalent to one metric tonne of carbon dioxide (CO2e) avoided or removed from the atmosphere.⁵

Notes & References: