'Power for all' can be achieved if exemptions continue
Inclusion of the power sector in the Dual Goods and Services Tax model requires critical deliberation, says Santosh Sonar.
Considering the critical need for energy to support the country's vibrant economic development, the Ministry of Power has set up an ambitious project, 'Mission 2012: Power for all.' Currently, the installed power generation capacity in India is about 181,000 MW and over 80,000 MW of new power capacity is under-construction. Sushil Kumar Shinde, the Union Power Minister recently said that the 12th Five Year Plan aims at capacity addition of nearly 100,000 MW. He added that from 2007 to 2012, i.e., during the 11thFive Year Plan, the funding requirement for the power sector is about $230 billion. He anticipated similar investments for the 12th Five Year Plan. Also, due to the liberal tax framework, the overall generation capacity in the country has increased from 771.551 billion units (BU) in FY2009-10 to 811.143 BU in FY2010-11. All projects for the 11th Five Year Plan and 78,000 MW for the 12th Five Year Plan have achieved financial closure. The growth in installed capacity from 2009 to 2011 is shown below:
During the 11th Five Year Plan period alone, the growth in power generation is as shown along side.
*The growth in generating electricity during 2008-09 was constrained due to delays in commissioning of new units, long outages, shortage of coal, gas, nuclear fuel, poor hydrology, etc. However, these have improved in subsequent years. To achieve the goal of 'Power for all' at sustainable low costs, the sector will require fiscal support in the form of minimal taxes from the government. For accelerated development of generation capacity, the Ministry of Power has envisaged and encouraged construction of ultra mega power plants (UMPPs) and mega power plants (MPPs) with a capacity of over 1,000 MW.
Indirect tax incentives
The central government has provided various exemptions from indirect taxes for initial setting up of MPPs, UMPPs or other power projects under the International Competitive Bidding (ICB). The current tax structure for supplies to power plants is depicted in the table:
A key hindrance to availing customs duty exemption was the delay faced by developers to furnish a certificate from the Ministry of Power. The lead time in getting such a certificate was holding back initial imports. This also led to developers having to pay customs duty on such imports as the projects were not approved at the time of import.
In July 2011, to overcome these difficulties the government enabled duty-free imports. Currently, this is based on submission of a provisional status certificate from the Ministry of Power along with a fixed deposit receipt from any scheduled bank as security for a term of 36 months or more. Also, the fixed deposit receipt should be equal to the quantum of exemption claimed at the time of import. However, on failure to furnish the final certificate within 36 months from the date of import, the fixed deposit receipt will be appropriated by the authorities towards the duty payable. This step has eased the working capital requirement for power projects.
Disparity in tax incentives
The current tax incentives offered show that a MPP has clear tax advantages as compared to a non-MPP project. The non-MPP projects are required to pay effective customs duty of 20.941 per cent (i.e., basic customs duty at 5 per cent along with full countervailing duties of 10 per cent and special additional duty of 4 per cent) on the value of imported goods.
Considering the advanced technological requirements, many power developers import equipment such as boiler, turbine and generators (BTG) for two distinct reasons- tax advantages and the need for superior and critical technology to set up MPPs or UMPPs. This significantly increased the import of equipment from China and in turn affected the sales volumes of domestic engineering companies.
As a result, there was an increase in representation to the government to enable a level-playing field for domestic manufacturers by withdrawing the customs duty exemption enjoyed by MPPs. One of the members of the Planning Commission has also recommended a 14 per cent import duty on power generation equipment. The decision to levy import duty on such equipment will drastically enhance the cost of setting up MPPs or UMPP which have been awarded on the international competitive bidding basis. Obviously such a move has been opposed by developers of power plants. The Ministry of Power is yet to take a decision on it. Therefore, the debate to remove differential tax treatment of power projects depending upon their generation capacity continues.
In the past, the government provided a special tax regime or status considering the nature of the project and its importance to the national objectives. In the current power deficit scenario, the Ministry of Power is keen to continue tax incentives for developers planning to set up mega or ultra-mega projects. However, the concerns of the domestic industry need to be addressed to derive a balanced formula and to achieve a win-win situation for developers as well as domestic equipment manufacturers. In the interest of existing MPPs, any decision must be implemented with prospective effect and should not affect projects that are under-development. Withdrawal of exemptions during project execution phase will increase the cost of energy generation. Currently, only select state governments offer concessional value added tax rates for supply of goods for the initial setting-up of power projects. Considering the fact that exemptions to generation projects are the need of the hour, even state governments should endeavour to extend VAT benefits.
Future outlook: Continuity of exemptions in GST scenario
Considering the current scenario in India, implementation of Goods and Services Tax (GST) seems to be difficult in 2012, although there is a certainty that it will be introduced in the years to come. In this context, it is important to understand the treatment of the power sector under GST.
The first discussion draft paper suggested that the power sector should be outside the purview of GST. In other words, electricity duty will not be subsumed in GST. However, the 13th Finance Commission recommends inclusion of the power sector in GST. Inclusion of the power sector in the dual GST model will significantly reduce the cost of power projects and consequently the cost of generation and distribution of electricity.
However, extension of GST to the sector needs evaluation considering various factors such as:
In conclusion, a comprehensive tax policy for the power sector
needs to be developed considering the view and needs of all
stakeholders. Such a policy will go a long way in attracting sustainable
investments. A clear and certain tax policy will favourably propel the
power sector towards achieving the mission of 'Power for all'.
- Concessional GST rates to avoid an inverted tax structure;
- Exemptions to specified sectors like agriculture, farming, residential consumption etc.
- Seamless availability of input tax credits to reduce tax costs and
- Place of supply rules (whether linked to ultimate consumption or other parameters).
The author is Associate Director - Tax & Regulatory Services, PwC India. With inputs from Satish Bhanushali, Associate - Tax & Regulatory Services, PwC India. Views are personal.