By Aravind Srivatsan
ESG refers to an umbrella that covers a company’s views and policies for its stakeholders. ESG depends on the impact the company has or hopes to have on its stakeholders (including investors, lenders, customers, shareholders, employees, independent contractors, and the surrounding community). The environmental aspect of ESG includes the organization’s impact on the environment while carrying on a business. It consists of issues on climate change, energy usage, pollution, waste management, and natural resource protection. It also includes the company’s supply chain and logistics (manufacturers and distributors), source of origin of its commodity.
India Inc. has volunteered and committed to ‘Net Zero’ – which means stopping most greenhouse gas emissions completely, with mitigation measures to cancel the effects of those remains.
The Country’s economic & tax policy should enable the Corporate India to meet the commitments on climate change i.e., achieve the desired net zero impact, through stimulation of the flow of capital/ financing for the transformational investment needs.
Indian Story so far:
The Hon’ble PM Mr. Modi at the COP 26 Conference in Glasgow held on November 2, 2021, had emphasised the following:
In the midst of this global brainstorming on climate change, on behalf of India, I would like to present five nectar elements, ‘Panchamrit’, to deal with this challenge.
First – India will take its non-fossil energy capacity to 500 GW by 2030.
Second – India will meet 50 percent of its energy requirements from renewable energy by 2030.
Third– India will reduce the total projected carbon emissions by one billion tonnes from now till 2030.
Fourth – By 2030, India will reduce the carbon intensity of its economy by more than 45 percent; and
Fifth – by the year 2070, India will achieve the target of Net Zero.
Today, when India has resolved to move forward with a new commitment and a new energy, the transfer of climate finance and low-cost climate technologies have become more important. India expects developed countries to provide climate finance of $1 trillion at the earliest. Today, it is necessary that as we track the progress made in climate mitigation, we should also track climate finance.
The bold pledge of net-zero emission by 2070 at COP26 was a significant moment after hard-fight negotiations and pushbacks amidst the Global countries on their commitment to climate change. The commitments made by our PM to achieve binding targets on carbon reduction by 2030 in turn are binding on Corporate India. To make the commitment into reality, there is enormous work to be done in India which requires significant investment from Corporates to finance the transition to net zero within limited timeframe.
Budget Expectations 2022:
For Corporate India to create budgets for mega ESG investments, attract long-term and stable capital from bulge bracket funds such as Sovereign Wealth and Pension funds, it is preferred to have a separate tax code to govern ESG investing or brings back suitable thought-through provisions (similar to prior investment allowance provisions) in the tax law to facilitate ESG investing, some of which are as follows:
- Permit Corporates who undertake ESG investment to claim investment allowance on the value of investments made in new ESG assets. Revenue could further illustrate eligible assets which would qualify for this benefit and lay emphasis on providing benefits for large scale capex. Illustratively, Govt. can introduce investment allowance similar to allowance permitted for investments in ‘environment protection’ up to 35 percent of the cost of investment earlier under Section 32A(2C) in the past vide CBDT Notification. No. SO 555€ dated 1-8-1984.
- Renewed impetus to R&D spends to encourage indigenous development of technologies and incentivize Corporates who invest in cutting-edge R&D on better environmental and social outcome thereby retaining the talent pool and propel knowledge-based solutions & innovations. Seen in the context of the recent track record of tax incentives on R&D, large capex investments which have been run down consciously, R&D investment and innovation must be tax incentivized to be in sync with India’s long term economic aspirations & commitment to climate change.
- The favourable tax policy eco-system allowing large India Inc. to raise significant debt through IFSC exchange platform needs to be harnessed to accommodate and facilitate more Corporates India to explore overseas fund-raise with listing of securities/ bonds in IFSC exchanges. Govt. needs to react quickly with enabling the eco-system & tie-ups with sovereign Stock Exchanges (illustrative, SGX tie-up w.e.f. 2013) which are in place to raise funds that will allow more corporates to fund their ESG program.
- To illustrate, the recent listing of green bonds (the proceeds of which will be used to fund projects in renewable energy, low carbon buildings, waste & pollution control, sustainable transportation projects etc,.) by SBI simultaneously on the India International Exchange (India INX) and the Luxembourg Stock Exchange is a welcome move towards our country’s visions of net zero which will open up new avenues for market development and fundraising opportunities in this space.
Some of the tax incentives available in other countries:
While India is yet to decide on incentivising the ESG related investments, few countries have already provided for tax breaks in their local tax codes, some of which are as follows:
|Tax Credits||Reduced Corporate tax rate||Investment Allowance||Special Tax depreciation||Tax Holiday benefits|
The next decade belongs to India and with its demographic dividend there should be enough scope for significant work that needs to be done and India can take a lead by ensuring there is generous fiscal stimulus to ensure the world researches and develops prototypes for climate change from India.
The Govt. has consciously responded in the past through tax code for Corporate India in situations where transformational investment was required (or) where there was a need for economic push. One such instance is the introduction of granting deduction for expenditure on Y2K compliant computer system through Finance Act, 1999.
We have enough tax provisions in the past, but this is the time where the Govt. should introduce a completely new tax code which allows a combination of enhanced deduction on R&D investments, hardcore ESG investments contributing to the net-zero commitment, inter alia, allows the patent box regime to be modified to allow corporates to license ESG from India as per GMT, thereby provide incentive for all categories of taxpayers.
(Aravind Srivatsan is Tax Leader at Nangia Andersen LLP. With inputs from Lakshmi Sankar, Director, Nangia Andersen LLP. The views expressed are the authors’ own.)