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Web Exclusive | March 2016

Budget 2016-17: Thrust to nuclear to raise capacities, doubling ‘Clean Cess’ to boost renewables

The Union Finance Minister Arun Jaitley has turned his focus on to nuclear energy as a source of power generation in a bid to diversify the power sources, in his Budget 2016-17, presented on February 29, 2016. This will be in addition to the renewable energy initiatives announced a few months back.

“The Government is drawing up a comprehensive plan, spanning next 15 to 20 years, to augment the investment in nuclear power generation. Budgetary allocation up to Rs 3,000 crore per annum, together with public sector investments, will be leveraged to facilitate the required investment for this purpose,” said the finance minister.

Hike in Clean Environment Cess from Rs 200 per tonne to Rs 400 per tonne is another major decision announced in the budget impacting the power sector. This scheme is renamed as ‘Clean Environment Cess’ in the budget. It is levied on coal, lignite and peat. The other major proposals in the budget include achievement of 100 per cent village electrification byMay 1, 2018, tweaking excise and basic customs duties to promote renewable energy sources.

India’s power generation is predominantly driven by coal, which is considered to be a source of high pollution, at present. It corners about 70 per cent of the power generation capacity, while the renewable energy inputs could contribute only 30 per cent. Nuclear energy’s share is barely 2 per cent at 5.7 GW (1 gigawatt equals 1000 megawatts) of the installed capacity of 288 GW in the country at end-January 2016.

Commenting on the budget proposals pertaining to power sector, Manish Aggarwal, Partner and Head of Energy and Natural Resources, KPMG in India, said, “The budget refrained from big bang measures and focused on consolidation to achieve ‘energy security’ for the Country. Intent to have a ‘comprehensive generation plan’ over next 15 to 20 years for nuclear power brings this important resource to mainstream focus apart from Renewables, which is good as it would remove India’s ‘fascination with single fuel’ and bring a holistic view required to achieve energy security. “

There was a sharp reaction from the industry on the doubling of clean environment cess to Rs 400 per tonne in the budget, with most of them feeling that it will have adverse impact on power sector.

“The increase in coal cess will improve relative attractiveness of renewables, but increase the overall cost of power for utilities by approximately Rs 10,000 crore, thus impacting retail tariffs and utility financial health,” said Anish De, Partner Infrastructure and Government Services, KPMG in India in a statement. The net rise in cost of power is expected to be roughly 12 to 16 paise per unit.

However, Shirish Garud, Director and Senior Fellow Energy and Environment Technology Development Division, The Energy and Resources Institute, exudes hope, “It (the cess) would further include an umbrella of projects under the fund and would provide a significant boost to the research and development and other clean energy development activities.”

While giving a commitment that the government will achieve 100 per cent village electrification by May 1, 2018, the minister has provided Rs 8,500 crore for Deendayal Upadhayaya Gram Jyoti Yojna and Integrated Power Development Schemes, the nodal agencies for the scheme. As on 23rd February, 2016, 5,542 villages have been electrified under the schemes since April 1, 2015 when a total of 18,542 villages were yet to be electrified. This is also expected to boost overall demand for power in the years to come.

For renewables, the reduction of accelerated depreciation is expected to be a negative that will cause wind tariffs in particular to go up for projects set up after March 2017.  All in all, it is a mixed bag and the measures appear to be aimed more at shoring up government finances.

Hemal Zobalia, Partner, Deloitte Haskins & Sells LLP said, “The long standing issue on availability of incentive to power transmission companies is answered with additional depreciation of 20 per cent on new machinery being extended for power transmission as well. Reduced accelerated depreciation for solar and wind sectors may affect these sectors adversely where increased depreciation being set off against other profitable businesses was one of the prime incentives for investors.”

Excise duty on carbon pultrusions used for manufacture of rotor blades, and intermediates, parts and sub-parts of rotor blades for wind operated electricity generators were reduced from 12.5 per cent earlier to 6 per cent. Excise duty on Unsaturated Polyester Resin (polyester based infusion resin and hand layup resin), Hardeners/Hardener for adhesive resin, Vinyl Easter Adhesive (VEA) and Epoxy Resin used for manufacture of rotor blades, and intermediates, parts and sub-parts of rotor blades for wind operated electricity generators were increased to 6 per cent, from nil earlier.

“Changes in customs and excise duty rates to improve competitiveness and boost the domestic manufacturing has been seen as a welcome move by the industry. As a company which operates in the manufacturing sector, we believe that through this, there will be a spurt in the spirit of entrepreneurship, giving boost to the home-grown industries,” said Manish Goel, Managing Director, Shilpi Cable Technologies Limited Service tax on services provided under Deen Dayal Upadhyay Grameen Kaushalya Yojana and services provided by assessing bodies empanelled by Ministry of Skill Development & Entrepreneurship are proposed to be exempted in the budget. “This would help in bring down the cost of skill development services. Similarly, service tax on rural electrification has also been removed,” said Garud.

The budget is also expected to give a boost to PV manufacturing activity in the country, thus promoting the growth of indigenous solar manufacturers as new manufacturing companies incorporated on or after March 1, 2016 are to be given an option to be taxed at 25 per cent plus surcharge and cess provided they do not claim profit linked or investment linked deductions and do not avail of investment allowance and accelerated depreciation.

However, Manish Aggarwal expressed disappointment no concrete measures to resolve stressed assets issue directly have been announced in the budget. Expectation was to have a ‘specialised turnaround stressed fund’. Though budget reiterated the intent to resolve commercial disputes, and talked of having guidelines for ‘re-negotiation of PPPs’, and enhanced power of institutions under the SARFEASI Act, these may not lead to faster resolution of stressed asset problem in short term, Aggarwal added.

-BS Srinivasalu Reddy

(EoM)

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