Some Cheer For Conventional Power Sector

Nabin Ballodia, Partner-tax, KPMG
Energy is one of the most important indicators of the growth trajectory and sustainable development of an economy. With enhanced focus on climate change and clean energy, the quality of energy has attained significant importance. Hence, this sector was the most keenly watched in Budget 2012, not only in light of its impact on the common man but also in view of socio-economic factors and supply constraints.
In India, fossil fuels are the most important source of energy accounting for nearly 40% of the energy basket. With crude prices in the international market spiralling up and India’s continued over-reliance on import, expectations were high from the Budget proposals. As petrol prices are under strain after deregulation of prices, the finance minister was expected to provide some relief in the form of duty cuts and incentives.
In order to reign in the upward swing in prices, the industry was canvassing for ‘declared goods’ status for natural gas. This would have restricted VAT (value added tax) to 5% as against the current rate of 20% and would have brought natural gas at par with other sources of fuel such as coal and crude oil.
The industry was also expecting to see a withdrawal of the National Calamity Contingency Duty (‘NCCD’) levied on crude oil, which, as per some segments, has outlived its relevance. Further the oil exploration industry also expected exemption from service tax. However, none of these demands have found favour with the finance minister.
On the contrary, the 2% increase in service tax rate and introduction of a negative list for service tax would increase the tax burden on the sector. Additionally, the cess leviable on petroleum crude oil under the Oil Industry (Development) Act, 1974 has also been increased from R2,500 per metric tonne to R4,500 per metric tonne.
However, in line with the infrastructure impetus and the public private partnership (PPP) agenda of the finance minister — the Budget has provided for viability gap funding (VGF) for oil and gas pipeline and storage facilities.
On the other hand, the power sector which been marred by huge capacity issues, and fuel supply and funding constraints had something to cheer about. Imports of natural gas and thermal coal for generation of electric power have been exempted from customs duty.
The finance minister also extended the income tax holiday by a year which means that power projects that commence power production on or before March 31, 2013 would now be eligible for a 10-year income tax holiday.
In order to support financing of power projects, the income tax rate on interest payments by a power company to a foreign company has been reduced from the existing rate of 20% to 5%.
This would definitely help to reduce the borrowing cost for power projects. Further, to encourage new investment in the sector, benefit of an additional depreciation of 20% on new plant and machinery has been proposed.
This incentive, previously available to only to those engaged in the manufacture and production of article or thing, has now been extended to the power sector. These measures would surely have a far reaching impact on the sector.
Although the industry expected some bold measures on the renewable energy front, so as to bring the cost of producing renewable energy closer to the affordable range not much was offered from the briefcase of the finance minister.
The only incentive provided was an exemption from special countervailing duty (CVD) to plant and machinery used for initial setting up of solar thermal power projects.
It also proposed a concessional basic custom duty of 5% on raw material for manufacturing intermediate parts/ sub-parts of blades of rotors for wind energy generators.
In light of the various proposals, it can be said that Budget 2012 was a mixed bag wherein the conventional power sector had something to cheer about, although the renewable power as well as the oil and gas industry came back disappointed.