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For an em‘power’ing Budget in India

According to reports, the power industry is keenly awaiting Budget 2012 and expecting that it will provide a stimulus to the power sector, considering that the sector is facing various challenges. India has the sixth largest power generation capacity in the world with an installed capacity of nearly 182 GW — about four per cent of global power generation.

To fulfil its power requirement, the country will require installed capacity of 459GW by 2022. Given the scarcity of power, the Government should consider providing power sector players a more efficient tax and regulatory regime .

Under the existing tax laws, 100 per cent profit-based tax holiday is available to undertakings that generate and distribute power or undertake substantial renovation and modernisation of the existing network of transmission lines.

The tax holiday, which is available for 10 years out of 15, is due to end on March 31. Amidst other commercial challenges which the industry is facing, such as coal crisis, forex fluctuation, etc., the tax holiday sunset will be a further setback. Since power is essential for the growth of all industries, the Government should consider extending the tax holiday scheme for all power sector undertakings.

With increasing energy requirements, the thrust on renewable sources is a step in the right direction. The policy framework created by the Government, through the Jawaharlal Nehru National Solar mission, has accelerated the solar sector’s growth in the country. Globally, various countries such as the US, China, Brazil, Germany and Spain, promote renewable sources of energy through incentives such as credits, grants, tax-holidays, accelerated depreciation, etc. Based on representations made to the Government in the past, the tax holiday for the sector has been extended year-on-year till March 31.

Given that it takes almost a year to set up a wind/solar power plant, it creates uncertainty for the developers to estimate their actual project cost — i.e. should the financial model consider the current tax-holiday or not. Given such uncertainty in estimating project costs in the industry, the Government should extend the tax-holiday period for longer than a year.

The Direct Taxes Code Bill, 2010 (‘DTC’), is likely to be introduced from April 2013. The DTC plans to substitute the profit-linked incentives prevalent under the existing provisions with the investment-based deductions. This radical change would lead to lesser tax incentives for power sector players.

Further, it has provided for grandfathering of tax holidays to power undertakings which are eligible to claim deduction under the current tax laws for the unexpired period.

In this backdrop, the Government should consider extension of tax-holiday at least until the DTC is implemented.

To address the issue of indigenous coal scarcity, a Customs duty of five per cent on import of coal should be exempted. The incentives given to the power sector, which is one of the leading revenue-generating sectors, would be one of key highlights of the upcoming Budget for 2012-13. Considering the country’s huge energy demand-supply deficit, the Government needs to do something special in this Budget to boost the power sector.

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