MARCH 04, 2025

By Hiren Shah, Executive Director and Rakhi Modi, Associate Director, Deloitte

"ESG is the language of responsible growth, spoken by those who care about tomorrow" Rusen Kumar, Founder & CEO, India CSR

Environment, Social and Governance (ESG) is a buzz word today. Countries across the world are increasingly concerned about the way resources are used and the impact on environment, society and on future generations. Climate change and its impact on human life is already visible through global warming. Increased emission of carbon dioxide and greenhouse gases is one of the reasons for climate change. Industries in sectors such as energy, industrial, transportation and construction account for about 79% of the total emissions¹.

India has taken many initiatives for protection of environment, apart from the global commitment of net zero emission by 2070 at the COP26². The steps taken include persuading corporations to contribute to ESG initiatives, providing production-linked incentives for making solar photo voltaic modules³, mandatory expenditures by corporates towards corporate social responsibility, etc.

While there are initiatives to make the nation ESG-compliant, the success of such measures is dependent on implementation by corporations. To push for a strategic change, the government may provide further support to corporations to adopt ESG initiatives wholeheartedly. Tax incentives could be one strong motivator for corporations to align their business operations with sustainable business practices. Reduction in tax cost improves the bottom line for corporates, acting as a catalyst for encouraging taxpayers to contribute. Tax incentives, be it in the form of deductions, reduced tax rates or credits, if provided judiciously can lead to effective results.

World over, countries have adopted tax incentives as a tool to motivate corporates to contribute towards ESG initiatives. For example, in Singapore⁴, companies investing in energy-efficient equipment, renewable energy systems, or other green technologies, are eligible for a tax allowance on their capital expenditure. Generally, manufacturing, energy and transportation sectors benefit from such incentives as it helps to compensate for the initial investment cost. Singapore also provides accelerated depreciation allowance for energy efficient equipment which helps in lowering taxable income thereby raising the cash flow for other investments. Another strategy adopted by Singapore is to offer reduced tax rates for companies investing in high value, environmentally sustainable projects.

The United States provides Investment Tax Credit ('ITC') for efforts taken to grow solar energy. ITC is a tax credit that reduces the federal income tax liability for a percentage of the cost of a solar system installed during the tax year by individuals and corporates. This is in addition to depreciation which is allowed on the cost of the solar system. Since 2006, such government-backed support has helped the US solar industry grow by more than 200x, with an average annual growth rate of 33 percent over a decade⁵.

As far as the domestic direct tax regime is concerned, there are few incentives which may potentially encourage corporates to contribute towards ESG initiative as illustrated:

Though, India has a global commitment on emission, the country's steps to achieve this target have been rated "insufficient" by www.climateactiontracker.org. To gear up towards its commitment, India could consider tax proposals which would not only help in achieving ESG commitment, but also improve corporate productivity. A few examples:

- Weighted tax deduction/credit for investment in renewable sources of energy like solar panels, wind turbines, etc., similar to the ITC provided by United States, to encourage renewable energy consumption / use of energy-efficient equipment. This could be provided in the form of a percentage of investment made especially in sectors such as manufacturing, to reduce carbon footprint. It could be extended to specific innovation projects in emerging technologies like green hydrogen. Alternatively, additional depreciation may be provided to corporates for using energy efficient equipment, taking a cue from Singapore. A special depreciation scheme could be provided where businesses can depreciate up to 150% or 200% of the cost of energy-efficient equipment in the first year of use, which can further reduce taxable income.

- Tax deduction for CSR expenditure. It would prompt corporates to view CSR not as a burden, but as an investment. CSR not only fulfils company's commitment towards society, but also builds reputation and aligns with sustainable development goals.

- Weighted deduction for research and innovation in sustainable technologies or green products be it for companies or for research institutes. Though 100% deduction is available for research and development, weighted deduction in the range of 150 to 200% of research expenditure for green and sustainable innovations that reduce carbon emissions, may be considered.

Taking concrete steps to reach net zero commitment by 2070 is the need of the hour. Implementing tax measures can push businesses to invest in green technologies and in innovative green products. Incentivizing corporates to contribute to social causes will not only benefit the society but also aid in government's expenditure for such causes. Though tax incentive has its own challenges, a balanced policy can be beneficial for businesses, government, environment and the society at large.

[The views expressed are strictly personal.]

¹ Deloitte's ESG Preparedness Survey Report

² Climate Change Conference in Glasgow, 26th Session of Conference of the Parties (COP26)

³ https://mnre.gov.in/en/production-linked-incentive-pli/

⁴ https://www.tyteoh.com/things-to-know-tax-incentivessingapore-businesses

⁵ https://seia.org/solar-investment-tax-credit/