A new set of norms to enable transparent accounting of the increasing number of carbon credits earned by Indian companies, which are presently classified as other income, is being written by the Institute of Chartered Accountants of India (ICAI), the premier accounting body in the country.
Once in place, experts say it will make it easier for banks to provide credit for such projects. “We should be able to come up with the draft guidelines on carbon trading in six months. The group constituted under accounting standard board of the ICAI is working on the nuances of carbon trading norms,” said Ved Jain, president of ICAI. He added that India will take a lead over other countries if it can successfully develop such norms.
At present, most companies show earnings out of carbon credit trading as other income as they are not recognized by tax laws. Once an accounting standard is defined, companies will have to show these earnings separately. Carbon credit, or certified emissions reductions (CER), are awarded by the CDM (clean development mechanism) executive board, an arm of the United Nations, to projects in developing countries that ensure or certify reduced greenhouse gas emissions.
India, along with China, lead countries in earning carbon credits. According to government statistics, around 35% of the total 819 projects registered by the CDM executive board are from India, the highest in the world. The Indian National CDM Authority has given host country approval to 753 projects, facilitating investments of more than Rs63,000 crore. The CDM executive board only considers projects approved by the host country.
These projects, which are in the sectors of energy efficiency, fuel switching, industrial processes, municipal solid waste, and renewable energy, have the potential to generate 421 million CERs by 2012. Environment ministry officials say that at a conservative estimate, this means an inflow of some $4.2 billion (more than Rs17,000 crore).
Indian companies sell CERs to companies in developed countries, especially in Europe, through bilateral deals or carbon exchanges. SRF Ltd, Gujarat Fluorochemicals Ltd, Oil and Natural Gas Corp. Ltd, and NTPC Ltd are some of the leading companies that use and sell carbon credits.
Critics, however, question the relevance of new norms for carbon trading.
“I don’t feel that new norms are needed for carbon trading unless there is a tax angle. I strongly feel these instruments should not be taxed as CDM gives certificates to discourage emission of greenhouse gases and therefore, earnings from carbon credit are for a bigger cause,” said a Delhi-based expert who advises companies on carbon trading.
Jain of ICAI defends the move. “We still have to see whether carbon credits will be classified as asset or income and at what point of time should the asset or income be recognized. Standardization will make the process of income recognition on account of carbon trading easier.”
The industry fears that once standardized, the government may decide to tax incomes earned through carbon trading as capital gains tax or even securities transaction tax if they are treated as instruments similar to equity shares.
D.J. Yadav, group vice-president of Arvind Mills Ltd, which has recently applied for CDM projects, said, “If putting in accounting guidelines is a way to tax carbon revenues, then it’s not welcome.”
An official at the Infrastructure Development Finance Co. Ltd, who advises companies on the feasibility of CDM projects, but did not wish to be identified since he was not authorised to speak to the media, said, “Carbon revenues are a short-term gain, and ultimately, when global markets mature, you can’t make a huge profit on carbon revenues alone.”