An effective tax policy to curb climate change

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A recent conference organized by the United Nations (UN) in Glasgow (COP26) discussed the impact of climate change on the global environment. Topics of discussion included recognizing the urgency of the situation, accelerating action, moving away from fossil fuels, delivering climate finance, building support for adaptation, and more.

Complex challenges require non-linear solutions. Financial expenditure is an essential resource needed to cope with the impact of climate change. Large organizations have committed financial investments to solve the problem. As environmental regulations around the world continue to evolve, proactive tax policy changes will encourage taxpayers to take faster action on this path.

There are broadly three approaches to approaching the issue from a fiscal perspective: granting incentives or imposing taxes or a dual system. Offering incentives has a huge impact on society. The imposition of additional taxes should only be considered for goods that endanger or have a negative impact on the environment. This article aims to introduce some easy-to-implement incentives in the near future.

Incentives for positive change:

A gradual transition requires incentivizing users. Currently, tax laws provide for a deduction of interest payable by an individual taxpayer when he has taken out a loan to purchase an electric vehicle. It would be useful if these incentives were not limited to individual taxpayers but also extended to companies. Also, the incentive is only available when a loan has been used and not when the taxpayer uses their own funds to invest. The deduction is further limited to Rs 150,000.

Corporate awareness of environmental and sustainability responsibilities is only increasing day by day. The adoption of less energy-intensive alternatives in the business sector should be encouraged. For example, the use of electric vehicles for the transport of goods on factory premises, for the movement of employees to and from their place of work, product deliveries by e-commerce companies, delivery companies of food, etc. In these scenarios, providing accelerated depreciation or a special deduction supplement in the year of purchase will encourage business.

Today, corporate social responsibility expenses are expenses that do not benefit from any tax deduction. Many companies donate money to environmental causes. Restoration of lakes/beaches that have been destroyed over time, tree planting to improve reforestation in areas devoid of forest, water neutrality programs, etc. are some of the initiatives taken. Ideally, these expenses should qualify for a weighted deduction given that the organization is acting for non-business causes. Unfortunately, the expense is not deductible, let alone claimed as a weighted deduction. Incentivizing organizations to adopt cost-effective mechanisms and promote the use of clean energy is one of the expectations of the 2022 budget. For example, offering tax credits at market rates for the use of energy sources renewable.

Investments in research and development in sustainable development

Until March 2020, Indian tax laws allowed a weighted deduction to companies that had an approved research and development facility. However, this incentive has been withdrawn like many others, effective April 2020. Today, organizations around the world are investing capital in the sustainable transformation of their businesses. Investments range from research around reusing some of the components/materials from older/recalled products that reduce expenditure on additional resources, using cleaner energy sources, driving towards carbon neutrality in factories, etc A new R&D incentive framework needs to be quickly developed and implemented to encourage momentum in this space. The framework should provide a mechanism to capture the measurable impact that results in credit.

Indian tax laws have always encouraged socio-economic development. The establishment of manufacturing units in remote areas has promoted employment and the development of these areas. Encouraging technology exports has led to a sea change in the growth of urban markets. Now is the time for us to proactively protect the environment and what has been built over the years. It is therefore imperative that the proposed budget includes initiatives in favor of the environment and sustainability.

The author is a partner at Deloitte Haskins & Sells LLP. The opinions expressed are those of the author.

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