The potential of CDM projects to attract foreign capital and technology and fetch foreign exchange is enormous... Sanjay Kapadia & Kailash Anerao INDIA and China are dominant players in the global carbon market today. As far as India is concerned, one-third of the total Clean Development Mechanism (CDM) projects registered with the United Nations under the Kyoto Protocol are from India. Through such projects, Indian industry generates large amount of carbon credits, which are now extensively traded on international exchanges. The CDM allows industrialised countries to meet their emission reduction commitments under the Kyoto Protocol by purchasing carbon credits from developing countries like India and China. Hence, a variety of investors and technology suppliers are always willing to finance/support CDM projects. During 2007, India generated over 27 million carbon credits (nearly doubled over 2006), which not only helped India Inc to showcase to the world its unflinching commitment towards global environment conservation but also showcase its growth process. While there is a huge potential for a range of Indian companies to generate substantial foreign exchange revenues through CDM projects, there are a number of regulatory issues that need to be sorted out. Taxability of the income earned from sale of carbon credits is one such issue that is yet to be addressed. Prolonged litigation seems inevitable in the absence of any specific provisions in the Income-tax Act, 1961 and lack of judicial precedents on the subject. To begin with, the controversy is mainly regarding the income head under which the income from sale of carbon credits [technically referred to as Certified Emission Reductions (CERs)