The Budget tried to build on the incentives to the limping power sector granted by the Prime Minister recently. It cut customs duty on thermal fuel for power companies and made financing easier.
Calling it a sector which has been under stress, Pranab Mukherjee made a slew of announcements, an important one being a full exemption on customs duties for the import of thermal fuels for power plants – coal and Re-gasified Liquefied Natural Gas (R-LNG). Steam coal will get full customs duty exemption for two years (with the concessional counter-veiling duty of one per cent), natural gas, LNG and certain uranium fuel get full duty exemption.
Though LNG prices, already high, may not be impacted, the measures would have an impact on imported coal-based power projects by reducing cost of fuel. “The customs duty exemption is good news,” said S Ramakrishnan, executive director-finance of Tata Power. The move could impact consumers through lower power tariffs though power companies per se would not benefit.
“Any such benefits should be passed on to the distribution companies. So, though this move will help reduce power tariffs and improve the plant load factors, for independent power producers, it is neutral,” said Pradeep Lenka, chief executive officer of Aditya Birla Power.
The FM directed Coal India to sign fuel supply agreements with the power sector. He also gave an incentive to the coal mining sector by reduction of customs duties on coal mining equipment, which will help power companies develop captive coal blocks.
But what the industry is cheering is a widely-expected measure which the Budget did not announce – an increase in customs duty on imported power equipment, a long standing demand of domestic equipment manufacturers. “The sector is going through a tough phase, and it would have added to the costs though it could have benefited power equipment makers,” said Debashish Mishra, senior director of Deloitte Touche Tomatsu.
“If there was five per cent increase in customs duty, it would have added as much as 20 per cent to the costs,” remarked Ashok Khurana, the director general of the Association of Power Producers. The association termed the Budget proposals as a ‘comprehensive incentive package’ for power sector.
The finance minister extended the tax holiday, the sunset date for 80IA benefit of the Income Tax act by one year, till 2013. “With a view to increase investment in power sector, 100 per cent profit-based deduction which was due to expire on 31 March 2012 has been given lease of life for another one year which is more on expected line,” said Hemal Zobalia, the partner at KPMG India.
Apart from fuel, a roadblock for power sector is financing. The FM tried to fix this problem by extending financing avenues. He doubled the tax-free bond limit for power sector to Rs 10,000 crore, permitted External Commercial Borrowings (ECBs) to part re-finance the rupee debt on power plants, and reduced withholding tax on ECBs from 20 to five per cent for three years (till 2015), to reduce the overall cost of debt. The measures drew mixed reactions. “It does increase the availability of funds but it will be tough to do the actual financing until there is stability in the rupee,” said Ramakrishnan.
Some industry watchers had a realistic reaction. Pradeep Bharghava, the managing director of Cummins Generator Technologies said power sector’s problems cannot be fixed in the Budget. “It is like trying to bandage the small cut of a person who is suffering with multiple fractures. But the FM has done all that can be done in the Budget,” he said.