We study the relationship between corporate taxation and carbon emissions in India. Results indicate that dirty firms pay lower profit taxes and emit more. Hence, profit taxes are distorted in favour of the dirty firms and stem from the fiscal advantage of corporate debt. This result is evident from the data as dirty firms use more tangible capital, borrow more, and enjoy higher tax shields. Minimizing heterogeneity in inter-firm profit taxes can reduce carbon emissions in a steady state; however, higher innovation, such as higher spillover from R&D, would make firms competitive in reducing carbon emissions. At the same time, this research concludes that cleaner firms tend to emit less and pay higher profit tax. Significant financial stability and sustainability through reducing carbon emissions can be achieved with additional corporate eco-tax in the Indian economy.