Budget 2017: Income tax break for carbon trading and strategic oil reserves

The incentives seek to support energy security and climate change goals of the country


Union finance minister Arun Jaitley has proposed to cut the tax on gains from carbon trading to 10% from 30% in a move expected to make investments into energy efficiency and clean energy more rewarding. Photo: Aniruddha Chowdhury/ Mint
Union finance minister Arun Jaitley has proposed to cut the tax on gains from carbon trading to 10% from 30% in a move expected to make investments into energy efficiency and clean energy more rewarding. Photo: Aniruddha Chowdhury/ Mint

New Delhi: The fine print of Union budget 2017-18 has served incentives for the energy sector such as lowering the tax burden on carbon trading gains and making it more attractive for foreign oil firms to store crude oil in India’s strategic reserves.

The incentives seek to support energy security and climate change goals of the country after having decisively departed from petroleum subsidies.

Union finance minister Arun Jaitley has proposed to cut the tax on gains from carbon trading to 10% from 30% in a move expected to make investments into energy efficiency and clean energy more rewarding. The minister also extended the income tax exemption to foreign companies storing crude oil in India’s strategic reserves to any gains from sale of such oil even after expiry of the company’s contract with the Indian government. At the moment, this benefit is limited only during the contract period.

The Clean Development Mechanism (CDM) set up under the Kyoto Protocol of the United Nations Framework Convention on Climate Change (UNFCCC) allows investors in emission-reducing projects to generate tradable credits corresponding to the volume of emission reduction achieved. These credits can be sold to industrialized countries. So far, the income tax department has been treating the income on transfer of carbon credits as business income, subject to a 30% tax. Jaitley has proposed that it shall be a concessional 10% and applicable surcharge and cess. This amendment will take effect from the 2017-18 financial year.

The move to incentivize clean energy projects comes parallelly with gradual increase in taxes on petroleum products and the cess on coal, making India one of the leaders in climate change action. Since June 2014, when international oil prices started declining, India has increased excise duty on branded petrol from Rs15.5 a litre to Rs22.7 a litre as of December 2016 and on branded diesel from Rs5.8 a litre to Rs19.7 a litre, pointed out the Economic Survey 2016-17.

“In contrast, the governments of most advanced countries have simply passed on the benefits to consumers, setting back the cause of curbing climate change. As a result, India now outperforms all the countries except those in Europe in terms of tax on petroleum and diesel,” the survey pointed out.

Ashish Khanna, chief executive officer of Tata Power Solar Systems Ltd, said the budget demonstrated the government’s commitment to being a front runner in renewable sources of energy.

In line with the government’s stated objective of phasing out corporate tax exemptions in order to be able to moderate the corporate tax rate from 30% to 25%, Jaitley did not extend the income tax incentive for power projects under section 80 IA after it expires on 31 March 2017. Those who complete power projects before this deadline will, however, be able to claim full deduction of income from the project while calculating the company’s taxable income for 10 years.

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