You are on page 1of 3

Impact of the Budget on the Power Sector

Article 1

Over the past few quarters, the power sector has seen hard times given the severe liquidity
crunch that hit existing as well as new projects. And as such, the sector once again saw capacity
addition that was way below the targets set out as part of the XIth Five Year Plan. While the
situation on the funding side has improved considerably since the middle of 2008, companies are
stepping up on new projects with utmost caution. This is especially given that linkage for fuel
(especially coal and gas) is becoming a tough nut to crack. However, rural electrification
continues to get a boost in each passing budget and so is the improvement in the T&D network.
Budget 2011 was no different, as it allocated higher funds for the development of the power
sector with a view of speeding up the expansion of new generation capacities.

Budget Expectations
Removal of withholding tax on overseas investments in the sector

Measures that would help the sector raise long term funds at a fixed price

As per provision of section 80-IA(4)(iv) of the Act, profit earned by undertaking is exempted if it
begins to generate power up to March 31st 2011. The industry wishes to extend this by one
more year.

Budget Measures
Excise duty exemption for UMPP equipments to aid fast-track creation of new large-scale
power generation capacities.

FII limit for investment in corporate bonds issued in infrastructure sector has being raised to
enhance flow of funds to the sector.

Corpus of Rural Infrastructure Development Fund XVII to be raised from Rs 160 bn crore to Rs
180 bn.

Allocation of Rs 2,140 bn for infrastructure in 2011-12, and increase of around 23% YoY.

India Infrastructure Finance Co. Ltd. to achieve cumulative disbursement target of Rs 200 bn by
March 31, 2011 and Rs 250 bn March 31, 2012.

To boost infrastructure development, tax free bonds of Rs 300 bn proposed to be issued by
Government undertakings during 2011-12.

Special power cables connecting generators and right up to the transformer within the power
generation plant would be eligible for the benefits of the said exemptions.

Current surcharge of 7.5% on domestic companies proposed to be reduced to 5%.

Rate of Minimum Alternative Tax (MAT) proposed to be increased from 18% to 18.5% of book
profits.

Tax incentives extended to attract foreign funds for financing of infrastructure.


Additional deduction of Rs 20,000 for investment in long-term infrastructure bonds proposed to
be extended for one more year.

Budget Impact
Excise duty exemption for UMPP equipments to aid fast-track creation of new large-scale
power generation capacities.

Higher FII limit for investment in corporate bonds issued by infrastructure companies to provide
additional funding to the power sector.

Higher investment on rural infrastructure to aid development of the rural power distribution
network.

Higher allocation for infrastructure to aid the overall development of the power sector.

Reduction in surcharge of 7.5% on domestic companies to 5% to aid net profits of power


companies.

Tax incentives on foreign funds for financing of infrastructure to aid the sector’s financing
needs.

Company Impact
Excise duty exemption for UMPP equipments to benefit companies like Tata Power and
Reliance Power

Higher investment on rural infrastructure to benefit power transmission players like Power Grid.

Reduction in surcharge of 7.5% on domestic companies to 5% to aid net profits of all power
companies.

Article 2

The Union Budget 2011 brought some relief to India’s cash-starved power sector. The
extension of the tax holiday under Section 80-IA by one more year will benefit
projects expected to take off in the last leg of the 11th Five Year Plan (2007-12),
including ultra mega-power projects (UMPPs), and would generally encourage the
government’s efforts to scale up the country’s power generation capacity. Also,
extending the benefit under Section 80CCF of the IT Act by one year to allow deduction
of R20,000 for investment in notified long-term infrastructure bonds will help
channelise savings and investments.

The reduction in surcharge of 7.5% on domestic companies to 5% should aid power


companies’ profitability, while the increased limit of $40 billion available for FIIs
investing in corporate bonds issued by infrastructure companies and creation of tax-
incentivised infrastructure debt funds will improve availability of funds.
On the indirect tax front, although there has been no change in the peak rate of customs
or excise duty, or in the standard rate of service tax, the basic customs duty (BCD) and
countervailing duty has been reduced to 5% on specified goods used in high-voltage
power transmission projects, subject to fulfillment of actual user conditions, thereby
reducing the effective customs duty on such goods to about 15.15% from the standard
rate of 26.85%, which will propel growth. Steps have been taken to bring parity between
imports and indigenously manufactured goods for the power sector by granting excise
duty exemption to all machinery, equipment, and components and raw material used for
manufacturing such machinery and equipment supplied to UMPPs/mega power projects.
However, such goods are no longer exempt from customs duty, making domestic
manufacturers more price-competitive. This exemption has also been extended to power
cables used within power plants too.

To encourage the growth of solar energy, the government has extended the 100%
exemption from customs duty to toughened glass and silver paste imported to
manufacture solar cells or solar moduleson actual user basis. Although the basic customs
duty has been reduced from 5% to 2.5% on petroleum coke, the inclusion of coal in
various forms under the excise duty net (at 1% without availing Cenvat credit or at 5%
eligible for Cenvat) could result in higher input costs.

On the policy front, the government has further allocated Rs 58,000 crore to Bharat
Nirman, which among other things includes the Rajiv Gandhi Grameen Vidyutikaran
Yojna. It also launched the Power System Operation Corporation in October 2010 to
manage load and dispatch functions, earlier managed by PowerGrid. The central and state
electricity regulatory commissions have sanctioned 47 inter-state trading licenses, of
which 38 were in existence as on December 31, 2010.

The government needs to take several more concrete measures if it wants to meet the
stated target of adding 15,000 mw of generation capacity in the penultimate year of the
11th Plan.

—The author is tax director at E&Y

You might also like