Piling on to the pylons

The Union power ministry’s ambitions are impressive: it wants to achieve the goal of ‘Power for All by 2012’. While the bureaucratic works seems to be working apace, much needs to be done, not the least of which is in costing inadequacies and technology.

By Ravi Visvesvaraya Prasad

The Union ministry of power has asked finance minister P Chidambaram to be generous in extending concessions to the power sector to achieve the goal of ‘Power for All by 2012’. The power ministry has drawn up an ambitious capacity addition programme of 100,000 megawatts during the 10th and 11th Plans, calling for an investment of Rs 8,000,000 million.

In its pre-Budget demands to the ministry of finance, the power ministry has asked for direct tax concessions, reduction of excise and customs duties, and rationalisation of Central sales tax and local sales taxes. The power ministry has pointed out that for all other major sectors (cement, steel, petrochemicals, refining, etc), the excise cuty is Cenvatable/Modvatable. However, in the case of the power sector, since the finished product—electricity—is not an excisable good, the power sector cannot enjoy the benefit of Cenvat/ Modvat.

Moreover, the effective import duties at present are very high—22.58 per cent for generation projects, 28.51 per cent for transmission projects, and 34.44 per cent for other imports. In order to benefit State Electricity Boards and utilities, the power ministry has demanded that Section 195 A of the Income Tax Act (Tax on Income Tax) “may not be made applicable to companies engaged in the business of generation or transmission or sub-transmission or distribution of electricity”. Its rationale is that Power Purchase Agreements provide for post-tax rate of return at 14 per cent as fixed charges. In addition, the beneficiaries have to bear income tax liability due on generation income. At present, such liability of income tax on mercantile basis when billed to beneficiaries is treated as income under Section 195A. Such income is again added in generation income of the company and is subject to income tax. Therefore, the effective rate of tax on power generating companies works out to 50.74 per cent as against 33.66 per cent for other companies. According to the power ministry, if generation companies are exempt from Section 195 A, then the cost per unit can be reduced by Rs 2.33.

The power ministry has also demanded that the benefits of Section 80 IA of the Income Tax Act be extended to “Operation and Maintenance” companies. Section 80 IA provides exemption of profits for any 10 consecutive years, out of the first 20 years to infrastructure facilities. At present, this is available only to owners and developers in the power sector. However, in other infrastructure sectors like roads, highways, water supply, irrigation, ports, airports, etc, this exemption is also available to “Operation and Maintenance” companies, in addition to owners and developers.

Moreover, the power ministry wants the definition of the infrastructure sector to be expanded to include coal washeries, coal mining, and independent re-gasification plants for liquid natural gas.
If these proposals under Section 80 IA are accepted by the finance ministry in the Budget, then the reduction of the Fuel Cost of Generation (FCOG) would be 1.5-3 per cent.

Another Direct Tax proposal is that under Section 10 (15): both the Power Finance Corporation and the Rural Electrification Corporation may be permitted to issue tax- free bonds. The power ministry also wants power companies to be exempted from Section 115 (O), “Tax on Distributed Profits”, on the lines of developers, operators and maintainers of Special Economic Zones (SEZs).

Another demand of the power ministry is the modification of Section 194 I that deals with lease rentals. At present, tax is deductible on payment of lease rental on plant and machinery leased, by the lessor. Since the lease rental comprises of both principal and interest, deduction of tax results in taxing not only interest income but also the principal amount. The power ministry wants lease rent in respect of plant and machinery to be excluded from the purview of Section 194 I. This will enable financial institutions to lend through financial lease methods, besides regular lending for long term.

The power ministry also wants the introduction of a new Section 33 C in the Income Tax Act “...where an assessee contributes to the Power Venture Capital Fund (the objective of which is to invest in equity of Power Projects/Companies) floated by Public Financial Institutions and which has the approval of the Central Government for the purpose, a deduction of investment allowance equal to 20 per cent pa of such sum contributed to such Venture Capital Fund be allowed under this Section for five subsequent years”.

The power ministry has also demanded several modifications in indirect taxes such as excise duties, Customs duties, Central sales tax and local sales taxes. It pointed out that for all other major sectors (cement, steel, petrochemicals, refining, etc), the excise duty is Cenvatable/Modvatable. However, in the case of the power sector, since the finished product—electricity—is not an excisable good, the power sector cannot enjoy the benefit of Cenvat/Modvat. The power ministry has demanded that the excise duty on the power sector be halved from its present level of 16 per cent to 8 per cent, as recommended by the N K Singh Committee. It also wants a complete waiver of excise duty on fly ash products to promote environmental safety.

The power ministry also wants the existing six sets of customs duties to be rationalised into two sets: (i) a concessional zero customs duties for mega power project imports, and (ii) for other projects, the customs duties should be 5 per cent with a countervailing duty of 8 per cent. The power ministry has also asked for a complete customs duty waiver on import of liquefied natural gas/natural gas, which, at present, attract a basic customs duty of 5 per cent. This will reduce the fuel cost of generation based on LNG by 4 per cent, which will result in an overall tariff reduction of 2.5 per cent. Waiver of customs duty on LNG would save the National Thermal Power Corporation about Rs 1,500 million per annum.

The ministry has also demanded the waiver of customs duty and CVD on LNG regasification plants and high power transmission equipment. Another demand is for customs duty exemption for construction equipment being used in hydropower projects, on the lines of exemption being presently granted to equipment used in the road works of the National Highway Authority of India.

Both Customs and excise duties should be waived totally for equipment for decentralised distributed generation projects in rural areas; for naphtha; and for energy conserving lighting items like compact fluorescent lamps, light emitting diodes, and electronic ballasts.

Eighteen per cent of India’s total power generation is used for lighting: it is only 8 per cent in developed countries. The ministry’s goal is to reduce power used for lighting by at least one per cent per annum. If the finance ministry accepts these proposals of the power ministry, then it will go a long way to achieve the goals of “Power for All by 2012”.