Should Singapore amend GST rules to enhance and promote carbon credit trading?
Singapore should consider amending the GST rules to support the development of a robust carbon credit trading marketplace.
Background
During Budget 2022, it was announced that the carbon tax rate of S$5 per tonne of greenhouse gas emission (tCO2e), applicable from 2019 to 2023, will be increased progressively with a view to reach S$50 to S$80 per tonne by 2030.
The government also announced that carbon tax-liable businesses will be allowed to use high-quality international carbon credits to offset up to 5% of taxable emissions from 2024.
In addition, there are plans by Singapore to scale up its efforts to develop an international carbon trading marketplace and a services ecosystem to support decarbonisation. To increase the trade of voluntary carbon credits, for instance, Singapore has been working with players such as Climate Impact X (CIX), a Singapore-based global carbon exchange and marketplace. A collaborative effort between Singapore Exchange, DBS Bank, Standard Chartered Bank and Temasek, CIX connects an ecosystem of partners, leveraging satellite monitoring, machine learning, and blockchain to enhance carbon credits' transparency, integrity, and quality.
The carbon exchange will be a digital platform for buyers and suppliers to trade large volumes of credits. It will cater primarily to large-scale buyers, including multinational corporations and institutional investors, and will provide the market with price transparency.
GST considerations
As the trading of carbon credit gains traction in Singapore, let us examine from a GST perspective, the impact to GST-registered businesses venturing into carbon credit trading activities.
Goods and Services Tax (Excluded Transactions) Order
Under the Singapore Carbon Pricing Act, effective since 1 January 2019, a carbon tax is imposed on businesses’ greenhouse gases (GHG) emissions if they exceed the stipulated emission threshold. They pay this tax liability out of the carbon credits purchased from the National Environment Agency (NEA).
The purpose of carbon tax is to discourage businesses from emitting GHG at their current levels. To align the Goods and Services Tax (GST) treatment with other non-taxable government supplies such as the Electronic Road Pricing system and Certificates of Entitlement provided by the Ministry of Transport, the issuance of carbon credits by NEA is treated as an excluded transaction[1] for which GST is also not chargeable.
On the other hand, purchase of carbon credit from the market (e.g., from foreign or local sellers of carbon credit) is considered a supply of services.
Section 10(2)(b) of the GST Act provides that anything which is not a supply of goods but is done for a consideration (including, if so done, the granting, assignment or surrender of any right) is a supply of services. Therefore, the sale of carbon credit[2] constitutes a supply of services for GST purposes as it confers a right to the buyer to emit, over a certain period, carbon dioxide or other GHG.
In other words, from the perspective of a GST-registered person in Singapore, the purchase of carbon credits from an overseas seller would constitute imported services that could be subject to the reverse charge (RC) rules.
Under the RC mechanism, GST-registered businesses must account for GST on their imported services falling within the scope of RC if they are not entitled to full input tax credits, or if they belong to a GST group that is not entitled to full input tax credits. Under the GST legislation, RC will not however apply if the imported services are used or to be used exclusively in the making of taxable supplies.
Hence, a Singapore GST-registered buyer, who is partially exempt, but subject to carbon tax could purchase carbon credits from an overseas person or local person to offset his taxable emissions from industrial activities. Currently, in the absence of guidelines or clarification from the Inland Revenue Authority of Singapore (IRAS), it is uncertain if this Singapore GST-registered buyer would be allowed to treat this purchase of carbon credits (i.e., imported services) as directly attributable to the making of taxable supply and hence falling outside the scope of services subject to RC. If such purchases are subject to GST (e.g., under the RC mechanism), the Singapore GST-registered buyer will be required to self-account for GST on the value of the imported services (i.e., the carbon credits purchased). At the same time, it would not be entitled to claim the input tax credits in full. This would result in an additional GST cost to the Singapore GST-registered buyer.
In the case of the carbon credit trader who buy and sell carbon credits, it is possible to take a position that any input GST incurred on the purchase of carbon credits is directly attributable to taxable supply, and therefore claim the full GST input tax.
Questions worth pondering
With an increasing focus on net-zero emission and the government’s aspiration to develop a carbon credit trading marketplace in Singapore, carbon credit trading will likely become more prevalent in Singapore.
Here are some of the questions with respect to the impact of GST on carbon credits worth pondering:
- What are the GST implications on the purchase of carbon credits from either an overseas or a local seller by a Singapore GST-registered buyer that is partially exempt (i.e., not entitled to full input tax credits)? For example, would the buyer be allowed to treat the purchase of carbon credits that are used to offset the taxable emissions from industrial activities carried on by the said buyer as directly attributable to the making of taxable supplies?
- Are there any additional GST costs that must be taken into consideration when deciding whether to purchase the carbon credits from an overseas seller or a domestic GST-registered seller versus purchasing directly from NEA where no GST would be incurred? The GST cost will even be higher when the GST rate is eventually increased to 9%[3].
- Should the government consider expanding the current GST (Excluded Transactions) Order to cover all carbon credit trading so that they are disregarded for GST purposes (i.e., out-of-scope supplies), and also exclude all carbon credit trading from RC?
The co-authors of this article are Yeo Kai Eng, a former EY partner and Danny Koh, Partner, Indirect Tax – Goods and Services Tax from Ernst & Young Solutions LLP.
