Responding to the concerns of the crisis hit power sector including the Association of Power Producers (APP), the Finance Minister, Pranab Mukherjee on Friday proposed a comprehensive package including customs duty exemption on imported fuel and lower levy on overseas funds for projects.

Presenting the budget in Parliament, Mr. Mukherjee said that in power generation, fuel supply constraints were affecting production prospects.

Power companies have been allowed to take the External Commercial Borrowing (ECB) route to part re-finance rupee debt on power plants, and the sector’s tax-free bond limit has been raised to Rs. 10,000 crore from Rs. 5,000 crore. “Producers of thermal power have been under stress because of high prices of coal. I propose to ease the situation by providing full exemption from basic customs duty and a concessional CVD of one per cent to steam coal for a period of two years till March 31, 2014,’’ Mr. Mukherjee said.

At present, imported coal attracts a customs levy of around five per cent. Full basic duty exemptions would be extended to power plant fuels such as natural gas and Liquified Natural Gas (LNG), uranium concentrate, sintered uranium dioxide in natural and pellet form. In a move that would reduce overall debt cost, withholding tax on ECB would be cut to five per cent from 20 per cent for three years. Further, the last date for power generating projects to seek tax holiday has been extended by one more year till March 31, 2013. “Additional depreciation of 20 per cent in the initial year is proposed to be extended to new assets acquired by power generation companies. There are signs of recovery in coal, fertilisers, cement and electricity sectors. These are core sectors that have an impact on the entire economy,” he said.

The Association of Power Producers (APP) - a grouping of about 22 private entities - said the budget proposals announced would go a long way in incentivising the power sector and benefiting the end consumer. The APP said 10 out of its 8 proposals had been accepted by the Finance Minister.

Tata Power managing director Anil Saradana said the extended tax incentives, the decision to allow ECBs, and reinforcement of intention to introduce DTC and GST in the near future should create a positive investment climate. He also welcomed the government’s continued interest in giving a boost to solar energy projects. “The waiver for thermal power companies will be beneficial for upcoming projects. The removal of customs duty on imported coal, natural gas, LNG, and the incentives for the mining sector will marginally improve coal supply, but is still a far cry from achieving adequate fuel security. However, other measures including the Fuel Supply Agreements with CIL should provide some relief,” he added.

Samir Kanabar, tax partner in member firm of Ernst & Young Global said a large part of the concerns of power sector have been taken care of and that this would bring the stressed out sector back on track.  “Essentially, the cost of borrowing should get reduced as IPPs will be able to replace their existing expensive rupee debt with low cost foreign debt and that too with lower tax cost of 5 per cent as against 20 per cent.”