Budget 2024 Tomorrow: What government can do to achieve the net zero emission target

The Indian economy has grown steadily in the last fiscal year, with the real Gross Domestic Product (GDP) estimated to have grown by 8.2% in FY 2023-24, compared to the 7% growth seen in FY 2022-23. Real Gross Value Added (GVA) has grown by 7.2% in 2023-24, over the 6.7% witnessed in 2022-23.

While FY 2023-24 has seen growth, there has however been a slowdown in all sectors at current prices.

The Micro, Small and Medium Enterprises (MSMEs) sector plays an important role in the growth of the Indian economy, with the share of MSME Gross Value Added (GVA) accounting for about 30% of the overall GDP, according to a government release issued in February 2024; share of MSME manufacturing over that of All India Manufacturing is around 36%. Also, the share of MSME related product exports is around 45% of total exports.

As on 05 February, 2024, the number of persons employed in MSMEs, as registered on the Udyam Registration Portal and Udyam Assist Platform, is 16,86,64,562.

However, a NITI Aayog report mentions that the carbon footprint of MSME is around 3-4% of the total carbon emission of India. A World Bank report says that CO2 emission (kt) for India stood at 2,200,836 in 2020, while in Brazil it was 414,139; China’s was 10,944,686 and Russia was at 1,618,271; the European Union CO2 emission was 2,465,025, while in the US it was 4,320,533.

India has various laws on Environment Social and Governance (ESG), and capital markets regulator SEBI has also mandated disclosure requirements under the Business Responsibility and Sustainability Report (BRSR) for listed entities for ESG implementation and also for core value chain for purchase and sale.

Countries have adopted various measures for net zero carbon emissions. The European Commission has implemented Carbon Border Adjustment Mechanism (CBAM) regulation which would also impact Indian exporters to these countries. Initially there is only a reporting requirement but from 1 January, 2026, registration, payment of tax, and/or purchasing of CBAM certificates will take effect.

How would our Indian MSMEs deal with such regulations in India and overseas, in understanding and implementing ESG in various facets of the businesses, be it employees, value chains – vendors/ suppliers, office administration, renewable energy, social impact or governance?

Further, from an investor perspective, there are green bonds, green insurance policies, green mutual fund schemes, green companies. Would the returns to investors be lower due to increased cost of implementing ESG? How can investors be incentivised to go green?

To incentivise India Inc in general and MSMEs in particular, the government could consider special weighted deductions / tax incentives for expenditures incurred for ESG implementation, so that Indian exporters do not have to pay CBAM taxes overseas:

-Enhanced deductions for employment cost of different abled persons, for women employees, car perquisite to be lower for hybrid cars, incentive to cycle to work (flat tax deduction), wellbeing of employees, retirement benefits, etc.

-Incentivising procurement from SME and MSME, from different abled individuals and women entrepreneurs.

-Reclaimed waste products and disposals – to be measured and incentive provided.

-Offices working on renewal energy to get weighted deduction for the cost of the energy.

-Incentives for training / awareness building cost.

-Social impact projects should be tax deductible. CSR spends should be tax deductible.

-Manufacturing units / factories in rural areas to get higher depreciation or weighted deductions for expenses.

-Deduction for investors in investing in companies that are ESG compliant or investment products like green bonds, green insurance policy, green mutual fund schemes.

-Weighted deduction on interest expenses for availing finance for low carbon transitioning.

Will India have a carbon credit trading platform in India? If so, what would be the tax implications of such trading of carbon credits certificates, characterisation of the income and expenses?

The Director General of European Commission was in India in July 2024, to discuss CBAM with Indian authorities. Would India consider similar taxes like CBAM, for imports of high carbon intensive goods into India?

Bahroze Kamdin is Partner - Deloitte India.