Union Budget 2012-13: Expectations of the Power Sector

by HIRANMOY ROY

This article reached us late last week. It could not be used earlier due to unavoidable reasons.

At the beginning of the 12th Plan, there is a genuine expectation from the Union Budget 2012-13 that there will be far more action-orientation and policy-setting based on the present needs than populist schemes.

The infra-sector is enthusiastically awaiting some energetic stimuli as it presently struggles with the broken cash cycles and high debt leverage. So the share of infra in the Plan Expenditure must be increased through budgetary provisions and outlays.
So let us see what are the key expectations for the power sector from the forthcoming Union Budget 2012-13.

India’s fast-paced economy is looking at sources of capital to fund its infrastructure development. Corporates too are looking to raise funds through bond issues. A good beginning has been made with private-sector infra-NBFCs and public sector undertakings offering infra-bonds.

In his last Budget Speech for 2010-2011, Finance Minister Pranab Mukherjee had said that in order to attract foreign funds for the financing of infra-structure, he proposed to create special vehicles in the form of notified infrastructure debt funds, subject to interest payment on the borrowings of these funds to a reduced withholding tax rate of five per cent instead of the current rate of 20 per cent and exempt the income of the fund from tax. If the upcoming Budget takes this forward, it will benefit the NRIs looking to invest in this segment. For instance, a recent infrastructure bond issue from the IDFC Infrastructure offered an interest rate of 8.7 per cent. NRIs, however, were not allowed to participate in this issue.
The government has taken a number of policy initiatives so as to achieve and sustain the economic growth rate targets. These include initiatives for the power sector such as the development of a number of mega power projects and nine ultra mega power projects (UMPPs) of 4000 MW capacity each at the coal mine pithead or coastal locations under an international competitive bidding process. These projects address the urgent need in India to quickly add significant generation capacity to cater to the growing demand and also fulfil the objective of ‘Power for All’. Budgetary support is needed to install all these projects.

Under section 80IA, an undertaking is eligible for tax holiday only if it begins to generate power by March 31, 2011. There is an immediate need to augment electricity generation capacity in the country. Industry has to invest large capital in setting up power plants to ensure uninterrupted power supply. Tax holiday under section 80IA for power plants is to be extended. This clause needs to be amended to extend the tax holiday.

In view of the re-investment needs by the holding company in the power sector, Dividend Distribution Tax should be levied only at the ultimate parent company level and SPVs should be exempted from the DDT

With the objective of ensuring that the cost of power is not significantly impacted with the introduction of the GST regime, it is submitted that the power sector should be made a part of the GST regime, so that input tax credits can be availed and these would to a certain extent balance the withdrawal of exemptions and con-cessions. As the objective of including electricity under the GST regime would be to enable availing of input tax credits, it would be ideal to include the sale of electricity as part of the zero-rated list.

Outright exemption should be provided to the power project developers eligible for deemed export benefits under Chapter 5 of the Foreign Trade Policy 2009-14 from payment of additional customs duty. This will be a great help to the power sector and will provide a big impetus to the power generation capacity addition that the country needs.

There is a need for the removal of MAT and DDT for SEZ units.
There should be service tax exemption for infrastructure projects in the power sector, on the lines of the benefits available for projects in other infrastructure sectors such as roads, railways and airports. This would reduce the cost of power generation, as the power generation companies are not entitled to credits on tax paid on procurements.

Withholding tax on external commercial borrowings of the infra-companies, especially power companies, should be removed and import duty on power equipments should be raised.

The limit for retail investment in infrastruc-ture bonds eligible for income deduction should be increased from the current Rs 20,000.

The implementation of the US $ 11 billion National Infra Debt Fund should be accelerated.

Concrete steps towards developing a deep and robust bond market, reforms in the areas of insu-rance, pension funds, resolution of equity issues, asset classification of infrastructure loans, and strengthening of institutional mechanisms to promote financing initiatives are some other suggestions.

Set up institution and mechanism for monitoring projects and ensure faster implementation.

Reforms with respect to improving the financial health of State distribution companies, long-term policy on fuels and land acquisition and environ-mental clearances should be carried out.

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THE XI Plan (2007-12) aims to address this problem by adding 78,700 MW of generation. Of that, 76 per cent is expected to be coal-based and 20 per cent from hydroelectric sources. India’s increasing dependence on coal generation to meet the electricity needs will continue well into the future. Nine UMPPs of 4000 MW each have been identified for development under the inter-national competitive bidding route. The Ministry of Power defines an UMPP as a coal-fuelled, super-critical power plant of about 4000 MW each involving an investment of about $ 3.5 billion. So the coal tax should be abolished.

Hydropower’s share of the country’s genera-tion capacity is expected to remain around 25 per cent in the long run. The North-Eastern region holds the greatest potential for hydropower. The North Eastern Electric Power Corporation Ltd. (NEEPCO) estimates potential hydropower in the region at about 60,000 MW. More budgetary provisions are required to increase investment in the North-Eastern region.

The Indian power generation market is the fourth largest in Asia and the sixth largest in the world. Coal fuels about 55 per cent of India’s power generation, and if current projections are accurate, that proportion will grow substantially in the next 20 years. To this point, India has met its burgeoning demand for electricity primarily with the development of conventional thermal power generation with coal representing the lion’s share of generating fuel.

In the year 2012 energy requirement should be 969 TWh and energy availability 821 TWh (Source: CEA); so the shortage is chronic. The Budget 2012-13 aims to address this problem by adding 78,700 MW of generation. Of that, 76 per cent is expected to be coal-based and 20 per cent from hydroelectric sources. As mentioned earlier, India’s increasing dependence on coal generation to meet the electricity needs will continue well into the future. Some projections point to over 70 per cent of electricity generation by 2030.

The following are the wish-list for the power sector:

1. With acute fuel shortage hurting projects, for the private power producers the Finance Ministry must abolish five per cent duty on the coal imported for power plants.

2. Customs duty exemption for various facilities such as coal transportation is required for mega power projects.

3. Need for waiver of withholding tax in case of External Commercial Borrowings. Further, the companies venturing into the power sector should be allowed to raise funds by issuing tax-free bonds.

4. Plan Expenditures must be increased

5. Set up funds for loans.

6. Coal tax to be abolished in view of its impor-tance as one of the prime inputs in the thermal power industry

7. Fund to provide soft loans to distribution companies.

8. Under Section 80IA tax holiday to be extended to power projects.

9. Increase spending towards distribution of power.

10. Coal India Ltd (CIL) should reduce tariff levels for coal.

11. Zero import duty on solar power equipments to be continued

12. Tax holiday to be continued for Solar Power Projects and also for Photo Voltaic (PV) material, zero import duty to be continued.

13. Import duty for fuel and equipments of Nuclear Power projects should be minimum.

14. Taxes on transmission equipments to be reduced.

15. Improve the financial health of the State Electricity Boards with higher subsidy and allocation.
These are the modest expectations of the Indian power sector from the Union Budget 2012-13.

Dr Hiranmoy Roy belongs to the Department of Economics and International Business, College of Management and Economic Studies (CoMES), University of Petroleum and Energy Studies (UPES), Dehradun.