The need for a reduction in carbon emissions was debated at the United Nations Conference on Environment & Development (The Earth Summit) in Rio de Janeiro in 1992, resulting in the adoption of United Nations Framework Convention on Climate Change (UNFCCC), an international treaty on environment. The Kyoto Protocol, 1998, was adopted by the parties to the UNFCCC with the objective of achieving quantified emission limitations through specific policies and measures to minimising the adverse effects of climate change. The protocol provides for various mechanisms like joint implementation, a clean development mechanism (CDM) and international emission trading to boost the cost effectiveness of climate change mitigation. India, along with other developing nations, is at an advantage as it can implement approved CDM projects for the purposes of trading CERs. One third of the total CDM projects registered with UNFCCC are from India. India's carbon credits' trading is expected to reach $100 billion by 2010. In 2007, a total of 160 new projects were registered with UNFCCC. As a consequence, Indian industry managed to generate over 27 million carbon credits. Indian projects receive further impetus by way of investments and finance from developed nations who are potential buyers of CERs. The Multi Commodity Exchange of India Ltd entered into an alliance with the Chicago Climate Exchange in 2005 to introduce carbon credit trading in India. This association has integrated Indian Markets with their global counterparts to cover risks associated with futures trading of carbon credits and ensuring best prices. CDM projects, mostly in key sectors such as manufacturing, energy, agriculture, mining and mineral production, would thus result in providing a boost to the Indian Economy. The major CDM projects are located in Rajasthan, Andhra Pradesh, Maharashtra Karnataka, Himachal Pradesh and Punjab. Trading in CERs, although at a nascent stage, has resulted in huge foreign exchange earnings for Indian suppliers. Typically, an overseas buyer requiring carbon credits to meet emission reduction targets enters into an emission reduction purchase agreement with a company engaged in an emission reducing project in a developing nation. However, on account of the ambiguity on the treatment of CERs from an indirect tax perspective, the following issues remain relevant for an Indian supplier of CERs: (i) whether CERs can be classified as goods or services for indirect tax purposes. Consequently, whether CERs would attract VAT (levied on sale of goods) or service tax (levied on rendition of services); (ii) whether the sale of CERs to overseas buyers would qualify as export of goods or services. To determine whether VAT or service tax would be applicable, it is relevant to determine whether CERs are classifiable as goods or services. At present, indirect tax legislation does not provide guidelines for such treatment and jurisprudence on this issue is yet to evolve. In the event of CERs being taxed as goods, it is felt that they should be accorded the same treatment as electricity for VAT purposes, that is, either CERs be excluded from the purview of VAT or be specified in the schedule of exempted goods. CERs, if made liable to indirect taxes, may adversely impact the carbon credit-trading boom in India. Indirect taxes embedded in an arrangement involving the sale or provision of services in respect of CERs would thus influence pricing and may make India a less attractive destination for carbon credit shopping. The government is expected to grant tax sops on carbon credit trading with a view to ensure its global commitment to the reduction of carbon emissions. Lack of clarity on the treatment of CERs for indirect tax purposes exposes Companies engaged in projects generating carbon credits to the threat of significant tax demands. The past year saw the Institute for Solid Waste Research & Ecological Balance urge the Centre to exempt carbon credit earnings from income tax, as well as service tax, and to issue separate orders to dispel all doubts on this issue. Various sectors had specifically sought clarification on the treatment of CERs in their Budget wish list. However, the Budget 2008 merely makes a passing reference to a trading platform for carbon emissions and does not shed any light on the aspect of taxation of CERs. The Institute of Chartered Accountants of India (ICAI) is currently working on accounting norms for carbon credits. According to ICAI, Companies who earn revenue by selling carbon credits will have to make their financial statements under the new norms from April 1. However, the new accounting norm on this issue is yet to be notified by ICAI. It, thus, has to be seen whether CERs are classified as a tradable commodity under the accounting norm.