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Cover Story | March 2017

Solar shines!

The Union Budget is full of sops for solar - in terms of investment, village electrification and taxes. But, it calls for building renewable power compatible T&D infrastructure on a war footing.

The much anticipated Union Budget 2017-18 has nothing much to offer to the power sector. It ended up reminding one of an old metaphor, ´Old wine in old bottle´. The key takeaways of the budget from the power sector point of view are setting 20 GW target for solar in 2017-18 (FY18), and 100 per cent village electrification by May 1, 2018, which are part of the government´s avowed programmes already. Any budget is like musical chairs - some of the segments will benefit and some lose. Though there is a renewed focus on solar to an extent, wind power has been neglected in the Budget. Reduction of duty on LNG imports by 2.5 per cent in the budget is likely to ease gas prices a bit. Extension of MAT (Minimum Alternative Tax) credit carry forward period to 15 years from 10 years is a positive for all infrastructure players.

However, the general thrust for small and medium enterprises (SME) is expected to have a rub off on MSMEs in power sector too. The thrust in the budget to promote manufacturing in the country is expected to boost manufacturing of solar panels, batteries and inverters, lighting etc., in the power sector.

Coming as it is against the backdrop of demonetisation initiative, which has roiled the economy over the short term raising the expectation from even the common people, the government has tried to soothe their nerves by offering some relief at the base level slab of income-tax. That is likely to nudge overall demand in the economy. To prepare for an anticipated problem of oil prices trending upwards, the government has decided to create an oil marketing behemoth so that it can take on any onslaught from global oil majors.

In the budget, the outlay for village electrification schemes was hiked by 35 per cent to Rs.10,600 crore. The budgetary allocation for renewable energy has been increased by 26 per cent to Rs.5,500 crore. Allocations under the Modified Special Incentive Package Scheme (M-SIPS) and Electronic Development Fund (EDC) have been raised to Rs.800 crore from Rs.50 crore.

The critical aspect of any budget per se is the income and expenditure plans of the government, particularly international rating agencies look at fiscal deficit for assessing the health of the government finances. On that count, the government seems to do a good job - setting the fiscal deficit target at 3.2 per cent of the GDP for FY18, compared to a target of 3.5 per cent in FY17 and 3.9 per cent in FY16. ´The government expects to hit its budget deficit target of 3.5 per cent of GDP for FY17. Our own forecasts for FY17 are in line with those of the government, but there is a small risk the final outcome will be higher due to the impact of demonetisation - which has affected economic activity since November,´ Thomas Rookmaaker, Director - Sovereigns, Fitch (Hong Kong) Limited, in a report.

Solar Focus
It is heartening to see that the solar capacity target for the coming fiscal is set at an ambitious 20,000 MW. To facilitate this, the second phase of Solar Park development with additional 20,000 MW capacity will begin soon. This target is in line with its aim to ramp up solar capacity in the country to 100 GW (one GW = 1000 MW) by 2022. The 20,000 MW was the target was first set by the Jawaharlal Nehru National Solar Mission (JNNSM) about seven years back to be achieved by 2022, but that much is being achieved in a year´s time now, much ahead of the JNNSM deadline. This has been made possible by the falling costs of solar installations over the years. Solar industry has also cheered the creation of `8,000-crore Dairy Infrastructure Development Fund (DIDF) over the next three years. ´It will be a boost for solar thermal industry. Much of the dairy processing requires heat up to 1200C and considering the vast solar radiation available, the feasibility exists,´ said Jaideep N. Malaviya, Secretary General, Solar Thermal Federation of India.

Higher targets were also supported by higher budgetary allocation for renewable energy, which are expected to facilitate higher capacity additions in the segment through higher disbursement under various viability gap funding schemes and other central financial assistance.

The government has proposed to use solar power in 7,000 railway stations spreading across the country, and work on 2,000 railway stations will be undertaken soon. This will enable railways to partly meet its energy requirements from renewable energy sources. ´While these measures would support the solar power segment, they would affect the demand for thermal power generation to some extent,´ said a leading rating agency, ICRA.

Installed capacity of solar was at 9,012 MW or just about 3 per cent of total power capacity of about 315 GW as on January 31, 2017, and if the FY18 target is achieved, the total solar capacity could touch or inch closer to 30 GW and increase the share of solar in the overall energy mix, at the cost of thermal energy capacity utilisation. There was no reversal in the reductions in Accelerated Depreciation and Section 80-IA benefits to solar generators that were announced last year, as expected by some, in the current budget.

´While removal of those incentives can be expected to increase solar tariffs across the board, we are still expecting very strong growth in the industry in FY 2017-18, and particularly in the commercial and industrial rooftop and open access segments, based on strong fundamental economics for solar power, as well as a push from governments for solarisation of government rooftops and educational institutions,´ Andrew Hines, Business Development Head, South India, CleanMax Solar.

Wind
However, the wind power generators were the unhappy lot as there were no incentives to boost this renewable energy source, despite it being a major component of the Prime Minister Narendra Modi´s ambitious 175-GW renewable energy programme, with a 60-GW share.

´As a professional stakeholder body, we are not too happy with the budget 2017 as there is nothing concrete on the renewable energy sector, considering it is one of the growing sectors in the country. The government has completely overlooked the wind energy division,´ said Sarvesh Kumar, Chairman, Indian Wind Turbine Manufacturers Association (IWTMA).

´Service tax could have been rationalised and at least some state level reforms and policies should have been introduced that could have helped us in our road plan for the goal of achieving 60GW by 2022,´ Kumar added.

The sector was expecting some incentives at least in the form of extension of generation based incentive. ´No mention regarding extension of generation-based incentive (`0.5/unit) beyond March 2017, is expected to impact wind power capacity additions adversely,´ said the leading rating agency, CRISIL in its report Bolstering Bharat - Budget Analysis.

With a special mention about the drive towards 100% electrification, the renewable industry was hopeful that there would be an announcement to support the achievement of the Government´s RE target 175 GW, said Tulsi Tanti, Chairman and Managing Director, Suzlon Group.

T&D
The ramp up in solar installations is expected to call for special transmission lines to carry intermittent power and batteries and inverters for storage of power, in the next couple of years.

This ´will require robust and timely power transmission networks that can deal with unpredictable renewable energy. With rapidly expanding renewable energy capacity, execution of transmission networks is the need of the hour,´ said Pratik Agarwal, CEO, Sterlite Power, a major private player involved in power transmission networks. Stressing upon the need for ensuring reliable power, Anil Chaudhry, Country President and Managing Director, Schneider Electric India, said, the thrust on renewables and rural electrification ´will require investments in grid management and digitisation of the grid to ensure supply of quality, reliable and safe power. It is important to stress that along with rural electrification, it is equally important to provide reliable and quality power which requires investments towards modernisation of the country´s transmission and distribution power networks and use of digitisation in grid management.´

Both these programmes will also boost demand for power support equipment like batteries and inverters, thus, helping companies like Su-Kam. Electric Lamp and Component Manufacturers´ Association (ELCOMA) India also believes that the budget will boost demand for lighting considerably.

´Especially the government´s focus on low cost housing in the budget is highly positive for the lighting industry,´ said Rakesh Zutshi, President, ELCOMA and Managing Director of Halonix Technologies.

Though a section of the power sector was anticipating an extension of tax holiday for undertakings engaged in generation or generation and distribution of power, there is no mention of extension of a 10-year tax holiday (under Section 80 IA) beyond March 31, 2017. ´This could adversely impact private sector projects (5-6 GW in power generation and 24 competitively bid inter-state transmission projects), which are expected to be commissioned by FY20. In the absence of this extension, equity internal rate of return (IRR) would be lower if such projects have not considered this scenario in their competitive bids,´ said CRISIL.

Village Electrification
Village electrification has been one of the flagship schemes of the government over the last two years, and it has set a deadline of May 1, 2018 for achieving this target. It has provided an increased allocation of `10,600 crore to the programme, which is 35 per cent higher than that of last year.

´Sustained by higher funding support under the Deen Dayal Upadhyay Gram Jyoti Yojana (DDUGJY), the village electrification programme is likely to have some positive impact on energy demand, and hence, on PLF levels for power generation entities,ö ICRA said.

Today´s budget gave a clear indication of the government´s focus to achieve ´sustainable energy for all´, higher allocations are expected to fast-track the rural electrification drive of the government, said Chaudhry of Schneider.

Jaideep Malaviya seeks a change in the definition of 100% Village Electrification to denote 100% electricity to all households in villages from just an electrical pole serving houses in the vicinity, in order to widen the beneficiary base of the scheme.

Boost to manufacturing
The budget has also proposed Rs.750 crore more funds (total allocation Rs.800 crore) to stimulate electronics manufacturing. This has the potential to boost manufacturing of solar panels and invertors and batteries, under the M-SIPS.

´The significant rise in allocation under M-SIPS and EDF, which provides capital subsidy of up to 25 per cent, is expected to benefit major domestic solar cell and module manufacturers, as well as foreign players planning to set up manufacturing base in India,´ said CRISIL.

lauding the budget for ´encouraging´ for manufacturers, Tulsi Tanti said, ´The budget promises a very robust forex reserve, with resilient domestic market, further capitalisation of PSU banks, and launch of Trade Infrastructure for Export Scheme (TIES), all of which can truly position the ´Make in India´, apart from establishing the country as a global hub for engineering goods.´

Taxes
There was no change in the corporate tax rates at 30 per cent, except for MSMEs with turnover of below `50 crore. As such the proposed effective maximum marginal rate for Indian companies works out to 34.61 per cent and for foreign companies it works out to 43.26 per cent, according to Deloitte.

Corporate tax rate for FY 2017-18 proposed to be reduced to 25 per cent plus surcharge and cess for SME companies with turnover or gross receipts not exceeding Rs.50 crore in the FY 2015-16. Deloitte says that the proposed effective maximum marginal rate for Indian companies would be 28.84 per cent.

Though the purpose of reduction in direct tax rate for MSMEs is different - higher tax compliance at the lower level of the corporate pyramid, which is more effective in job creation in the country - It will definitely have a positive impact on growth of MSME segment in the years ahead.

No significant indirect tax announcements were made in the budget, given expectations around the Goods and Services Tax (GST) implementation. Even in Excise Duty, Customs Duty and Service Tax, there is no change in the peak rates. However, customs duty and excise duty rates have been changed for certain specified products in the renewable energy sector (See In-Box).

The budget has proposed a reduction of import duty on liquefied natural gas (LNG) by 50 per cent to 2.5 per cent. ´However, it will not benefit the power sector as the duty is waived completely under the ´Scheme for Utilisation of Stranded Gas-based Generation Capacity´. However, continuation of the scheme beyond March 31, 2017, would be a key monitorable,´ says CRISIL.

Conclusion
An increased budgetary allocation for infrastructure segments like roads, housing and railways is expected to increase the energy demand from the industrial sector, demand from which has remained subdued over the past two to three years. On an overall basis, the budget provisions offer substantive promises to the power sector, however, as has been seen with earlier budgets, more detailing is required for implementation/ delivery mechanism and follow-up of on the budget promises. Thus, implementation is the key for tangible outcomes.

Key Takeaways
Positives:

  • Target for solar installations set at 20 GW, via solar parks
  • 100% village electrification to be achieved by May 1, 2018
  • 7,000 railway stations to use solar power, 2,000 to have solar generators soon
  • Big boost to electronics manufacturing under M-SIPS
  • New `8,000-cr Dairy Infrastructure Development Fund to boost solar capacity
  • LNG import duty halved to 2.5%

Negatives:

  • No reversal in the reductions in Accelerated Depreciation and Section 80-IA benefits to solar generators
  • No mention of extension of a 10-year tax holiday (under Section 80 IA) for power generators and distributors beyond March 31, 2017
  • No incentives for wind generators
  • Generation-based incentive (Rs.0.5/unit) for wind generators to go by end-March 2017

Major Allocations:

  • Budgetary allocation for village electrification schemes up by 35% to Rs.10,600 crore
  • Allocation for renewable energy up by 26% to Rs.5,500 crore
  • Allocation for M-SIPS, which provides capital subsidy, hiked to Rs.800 crore from Rs.50 crore

Taxation:
Corporate Tax for MSMEs (with < Rs.50 crore turnover) slashed to 25%

No change in corporate tax at 30% for bigger companies

MAT credit carry forward period extended to 15 years from 10 years

No changes were announced in indirect taxes, in anticipation of GST entry

Reforms on track, higher allocations for power: Deloitte
The budget has introduced several reforms thereby fulfilling the expectations of stakeholders to a certain extent.

The Finance Minister (FM) presented the much awaited budget after the historic announcement of the process of demonetization. The budget in itself was a historic one in view of the fact that it was the first one to be presented on 1st February and also it was the first time that the railways budget was merged with the general budget thereby discontinuing the colonial practice prevalent since 1942.

India has an overwhelming dependence on fossil fuels. Currently we import 80% of our oil and 50% of our gas requirements. Given our low per capital consumption and our expected energy growth, India has been identified as the fastest growing oil and gas consuming countries in the world by all major energy forecasters.

As India prepares itself for the post-demonetization era, the role of power sector has increased to help achieve the pre-determined objectives. Last year, the Government provided the much needed impetus to the sector with introduction of various measures like revitalization of Public-Private Partnerships (PPP), exemption to special purpose vehicles from dividend distribution tax etc.

This year, FM has allocated record funds of `3.96 lakh crores to boost the infrastructure sector. This is in line with the commitment made by FM last year to treat infrastructure sector as a pillar of Indian economy. With such high deserved allocation and announcing other policy measures, the infrastructure sector is again brought to the forefront of development. Investment in infrastructure, which has a positive ripple effect in the economy, was needed in the wake of demonetization.

Energy sector
For strengthening the energy sector, the Government has decided to strengthen strategic crude oil reserves. In the first phase, three such reserve facilities have been set up and it is proposed to set up caverns at two more locations namely Chandikhole in Odisha and Bikaner in Rajasthan thereby increasing the strategic reserve capacity to 15.33 million metric tonnes that will create stock of almost a month to meet emergency requirements. This may help us to reduce our reliance on imports.

Further, the Government is also planning to reap the benefits of solar energy by targeting to feed 7,000 railway stations with solar power in medium term. Work has already been started on 300 stations and for another 2,000 stations it will be taken as a part of 1000 MW solar mission. The Government has re-iterated its commitment to provide electricity to all villages by May 2018 and has increased the allocation of funds to rural electrification programme. Further, the Government´s proposal to create an integrated public sector oil major will enable facing the vagaries of global oil prices. Also, the clean energy commitment was reinforced with the reduction of Basic Customs Duty (BCD) on LNG from the current 5% to 2.5%. In case of renewable sector, while the disappointment over investment-linked incentive not being extended to power sector continued, there have been some positive policy measures with the second phase of Solar Park development for additional 20,000 MW capacity being announced which is keeping in track with India´s commitment to achieve 175,000 MW of renewable power capacity by 2022. BCD on solar tempered glass is reduced to NIL from 5% subject to actual user condition. Further, excise duty on raw materials used in solar tempered glass, solar photovoltaic cells etc., is reduced from 12.5% to 6% subject to actual user condition. This concessional duty of 6% is valid till 30 June 2017.

Reforms
The budget has introduced several reforms thereby fulfilling the expectations of stakeholders to a certain extent. Various relaxations have been provided by discontinuing the foreign investment promotion board and liberalized foreign investment policy. For resolution of disputes, Public Private Partnership and public utility contract, an amendment bill is to be introduced as part of Arbitration and Conciliation Act, 1996. In the context of leverage which is critical for financing, the impact of continuing reduced withholding tax of 5% on external borrowings and clarity on compulsorily convertible preference shares conversion will have a positive impact. However, thin capitalization regulations restricting interest deduction in relation to associated enterprises to 30% of EBITDA in case of funding from foreign associated enterprises would require a relook at the financing structure which has depended on cheaper external borrowings.

On tax front, the industry has long demanded to scrap the provisions of Minimum Alternate Tax (MAT) in wake of profit-linked benefits available under normal income tax. However, as of now, the Government has decided to continue levy of tax as per MAT but has given some respite by increasing the period of carry forward of MAT credit to 15 years instead of 10 years. This may provide some benefit to companies as normally profit-linked deductions are available for a period of 10 years. Some relaxation is available to small domestic companies where the corporate income tax rate is reduced to 25% whose total turnover or gross receipts of financial year 2016-17 does not exceed `50 crore.

Further, the impact of the provisions of Indian Accounting Standards (IndAS) in the context of tax on book profits has also been clarified and the impact of transitional provisions which was a major hit has been spread over a period of 5 years. For e.g. loan given at a discounted or NIL rate to group companies are required to be fair valued on adoption to IndAS. Profit on such fair valuation will be taxable over a period of 5 years. Some relief is also provided for computing capital gains in case of immovable property where the period of holding for computing long term capital gains is reduced to 2 years from existing 3 years. The industry had demanded to exempt the income from transfer of carbon credit, however, a concessional tax rate of 10% on gross amount is proposed for the same thereby giving relief to companies where the same was taxed as business income, i.e. tax at 30%.

Various restrictions are also introduced on cash transactions. Payment in cash of Rs.10,000 to a person on a single day not to be allowed as a deduction. Also, any payment exceeding `10,000 for acquiring any asset shall not be considered while determining the actual cost of such asset, i.e. no depreciation benefit will be available on such payments exceeding `10,000. Further, cash transactions exceeding INR 3 lakhs in a single day from a single party or relating to one event is prohibited.

This may impact small companies.
Due credit is to be given to the Government which has maintained the focus on critical sectors and has managed fiscal prudence with populist demands. Overall, the budget has been positive for the sector and if followed up with implementation would yield the desired results.

Authors: Hemal Zobalia, Partner and Harsha Rawal, Director with Deloitte Haskins and Sells LLP

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