Indirect Tax News - January 2023

Carbon credits now not subject to GST

The Inland Revenue Authority of Singapore (IRAS) announced on its website in November that the issuance, transfer or sale of carbon credits—or the digital representation of such credits—will not be treated as a supply of goods or services for Goods and Services Tax (GST) purposes as from 23 November 2022.

Singapore introduced a carbon tax in 2019 on the greenhouse gas emissions of businesses that exceed specific thresholds at an initial rate of SGD 5 per tonne of CO2 equivalent (tCO2e).

During budget 2022, the Minister for Finance reiterated that Singapore is committed to playing its part in the global drive to achieve net zero emissions. To this end and to motivate businesses and individuals to further reduce their carbon footprints, the carbon tax levels will progressively increase during the period 2024-2030 as follows: (i) SGD 25/ tCO2e in 2024 and 2025; (ii) SGD 45/tCO2e in 2026 and 2027; and (iii) between SGD 50 and SGD 80/tCO2e by 2030.

According to IRAS, a carbon credit means:

  • A certificate representing an amount of greenhouse gas emissions reduction or removal, generated from any project or programme and includes a certificate representing the avoidance of an amount of such emissions;
  • A right to emit any greenhouse gas; or
  • A means to satisfy a tax or regulatory obligation arising from the emission of a greenhouse gas,

and includes a carbon credit issued by the National Environment Agency (NEA) for businesses to meet their tax obligations in Singapore.

The issuance, transfer or sale of carbon credits (or any digital representation of a carbon credit) before 23 November 2023 in return for consideration is a taxable supply of services subject to the then-applicable 7% GST (now 8%), except for the issuance of carbon credits by the NEA, which are treated as excluded transactions for which GST is not chargeable. In addition, carbon credits purchased by a Singapore business from overseas counterparties were deemed to fall within the scope of imported digital services that may be subject to GST under the reverse charge or the overseas vendor registration regime.

Under the revised policy, both the issuance, transfer or sale of carbon credits and the purchase of credits from overseas now are not subject to GST.

Benefits of the revised policy

Businesses (regardless of size) that wish to incorporate decarbonisation and climate risks into their strategies to remain competitive will welcome the change in IRAS policy, which will help reduce costs associated with the supply of carbon credits and incentivise businesses to be more proactive in mitigating climate change.

Given the high transactional amounts involved in buying and selling carbon credits, the exemption will also help deter missing trader fraud, which is costly for the government.

Singapore’s decision to revise the policy on the supply of carbon credits is similar to the GST and VAT positions adopted by New Zealand and the UK respectively, where the legislative frameworks have been amended to accommodate the use of carbon credits. The revised policy in Singapore is a step forward to ensuring that economic activities are aligned with a low-carbon future for the city-state.

Eu Chin Sien

Jackson Cai