 "Green transition: Expectations and recommendations for Budget 2025")
With the World Meteorological Organization confirming 2024 as the hottest year on record , and the last ten years all being in the top ten ever recorded, the call for countries to take action in relation to their climate commitments has never been more urgent. For its part, India has made significant strides in nearly tripling its renewable energy capacity from 2014 levels and is on course to achieve its 500 GW target by 2030 .
The country has also introduced various policies, including production-linked incentive (PLI) schemes and Faster Adoption and Manufacturing of Electric Vehicles (FAME), to promote the use of electric vehicles and green manufacturing.
In order to achieve India’s ambitious goals, it is important to establish a coherent and comprehensive tax framework which will incentivise green investment, support the renewable energy value chain and increase adoption of green practices across the industry and the public at large. The upcoming 2025 Budget presents such an opportunity.
Promoting investment and green financing
At the COP29 summit in Baku in November 2024, India was vociferous in its view that climate finance, especially for developing countries, was critical if the world were to achieve its climate targets. As a step towards enabling this and keeping in mind the need for India and Indian companies to be internationally competitive in this space, the government must institute a clear ‘climate taxonomy’ with definitions as to what would constitute ‘sustainable investment’. This would facilitate ease in access to incentives and benefits for projects which meet such standards.
Furthermore, these ideas must be paired with the establishment of tax incentives such as reduced rates of interest on debt for green investments, and a reduction or exemption from capital gains tax on such investments, which would enable capital inflow into India. With international carbon markets being critical to financing the transition to green energy, greater clarity on the tax treatment of trading in carbon credits by companies and their treatment from a Goods and Services Tax (GST) standpoint would be welcome.
Encouraging technological innovation
India is still reliant on foreign technology to support its green transition. With a view to provide a fillip to innovation, R&D and manufacturing in this space, the government should consider a lower tax rate or even complete exemption from corporate income-tax for companies and start- ups that invest in the creation of green technology. These exemptions must be carefully calibrated with a clear phasing out over time as the country transitions towards greener resources. Alternatively, the government could consider providing accelerated depreciation allowances for green technology, and super deductions (say 200 per cent of expenses) for R&D investment and promoting emerging technologies in this space such as carbon capture, grid technology and battery storage. However, any such exemptions and incentives will need to be balanced with the global move towards a minimum level of global tax rates for multinational companies – as envisioned in the Pillar 2 framework.
Incentivising the adoption of e-mobility
The shift towards sustainable mobility must be accelerated with targeted measures to spur the manufacturing of electric vehicles and supporting infrastructure. This can be done through a time-bound tax holiday regime for electric vehicle manufacturers, along with the introduction of accelerated depreciation benefits for charging infrastructure. While incentivising businesses in this manner is important, it is equally crucial for the government to push for a behavioural change amongst the public through measures such as providing tax breaks or rebates to the public on purchase of electric vehicles. In addition, aligning GST rates across the electric vehicle value chain and reducing duties on key components such as batteries can lower costs of production and make such vehicles more accessible to the common man.
Green hydrogen
India’s National Green Hydrogen Mission seeks to make India ‘the global hub for production, usage and export of green hydrogen’. The mission aims to support the country’s transition to clean energy. In order to support this stated objective, some key measures such as reducing GST rates on green hydrogen and ammonia, offering relaxations on the set up of production plants in SEZs/EOUs, and lowering customs duties on essential materials for such plants will be important. These benefits can also be extended to renewable power plants set up to supply energy to green hydrogen plants.
Also Read
Ensuring a just transition
The shift to a green economy will come at a significant cost by way of job displacement in traditional sectors. A successful transition will entail retraining and re-skilling workers and creating a social safety net to avoid leaving vulnerable communities behind. Recognising this and incentivising companies that invest in such training or skilling programmes for workers will ensure inclusive growth during this transition phase.
India, along with its global counterparts, stands at a crucial juncture in history, with temperatures rising at unprecedented rates. Budget 2025 offers us the opportunity to accelerate our transition to a greener and cleaner world through a carefully thought out, comprehensive and time-bound tax policy. The time is now.
(The writer is a partner, Price Waterhouse & Co LLP) Disclaimer: These are personal views of the writer. They do not necessarily reflect the opinion of www.business-standard.com or the Business Standard newspaper