Budget 2014: Suitable provisions required for the growth of the power sector
Tax Partner, EY
Senior Tax Professional, EY
Power has remained one of the key inputs for economic and social development of any country. In a power deficit country like India, the sector assumes all the more importance in view of its ever-increasing energy needs. Thus, it is imperative for the government to bolster the power sector and develop adequate power infrastructure to achieve sustainable economic growth.
The newly elected government acknowledges the importance of this sector as reflected by its endeavour to address bottlenecks facing the sector by clubbing together the Power and Coal ministries under one Union Minister, as well as its commitment to provide "Power for All by 2022".
Taking into consideration the goals of the new government, the forthcoming Union Budget 2014 is expected to acknowledge the key sectoral issues and present a roadmap by way of amending/clarifying through suitable budgetary provisions.
Extension of Tax Holiday (80IA)
Given India's rising energy requirements, it is crucial for the new government to expand power generation capacity manifold. This would require the sector to be adequately profitable to attract the all-important private capital. While the current tax regime provides for tax holiday only if an undertaking commences power generation before 31.03.2013, we believe the sunset clause for claiming profit-linked incentive must be amended, extending the tax holiday period by another 5 to 10 years.
Exemption from Minimum Alternate Tax ('MAT') during tax holiday period
Another key aspect which would require immediate attention in this year's budget will be exemption of power companies from applicability of MAT during the tax holiday period. While the power companies enjoy profit-linked income-tax holiday, they are still required to pay MAT on their book profits. The payment of MAT not only nullifies the objective of tax holiday but also results in cash outflows during the initial period, which in some cases may not be even recoverable if the project fails to yield any taxable profits.
Alternatively, where MAT provisions continue to remain applicable during the tax holiday period, it is recommended that MAT rates should be substantially reduced and wherever paid, MAT credit should be allowed to be carried forward and set-off without any time limit.
Investment allowance under section 32AC
This newly introduced section, subject to certain conditions, provides incentive in respect of acquisition and installation of new plant or machinery by a manufacturing company. Considering the significant capital investments involved in setting up of power infrastructure, this incentive should be extended to companies engaged in generation or distribution of power.
Exemption from Dividend Distribution Tax ('DDT') for Special Purpose Vehicle ('SPV')
To encourage re-investments by the parent company, we believe an appropriate strategy would be to levy DDT only at the holding company level with SPVs being exempted from any such payments.
Promoting Renewable Energy
Currently, the tax regime does not contain any specific provision promoting investment in renewable energy. Considering the necessity for setting up projects on renewable energy source, it is imperative that separate concessions/exemptions may be incorporated in the law as regards companies engaged in renewable energy projects.
Other Tax benefits for Power Sector
- To enhance the sector, incentives/ tax holidays should also be provided for entities engaged in manufacturing/ producing/ assembling of power generating equipment.
- It should be clarified that transmission and wheeling charges paid to State Discoms is not subject to withholding tax.
- Benefit of accelerated depreciation should be extended to taxpayers generating power through wind energy.
- From an indirect tax perspective, power generation is exempt from indirect taxes (ie VAT, Service tax, Excise Duty). Thus, input indirect taxes become a cost to the power generating companies thereby reducing project cash flows. Such input indirect taxes should be refunded to power generating entities or upfront exemption should be available in relation to levy of indirect taxes for services/ goods consumed by power generating entities.
The hopes remain high from the newly elected government to address the key issues currently being faced by the industry and reinforce the investor sentiment in the sector.