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Updated: February 17, 2010 14:47 IST

Proposals that can light up the power sector

D. Murali
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Arvind Mahajan, Head of Energy and Natural Resources, KPMG
Special Arrangement Arvind Mahajan, Head of Energy and Natural Resources, KPMG

Given the fact that power has become an essential ingredient of our lives and the deficit in power availability is a major impediment to the smooth development of the economy, the Government should realise the need for encouraging the power sector, says Arvind Mahajan, Head of Energy and Natural Resources, KPMG.

Infrastructure bottleneck is the single-largest hurdle to achieving the increased rate of economic growth that we are aiming at, he mentions, during the course of a recent pre-Budget email interaction with Business Line. “The Planning Commission estimates that the infrastructure spending needs to increase from 4 per cent of GDP to 9 per cent of GDP to be able to support the economic growth targets. And the road ahead for the Indian power sector which is seeking to achieve sustainability is dotted with innumerable challenges.”

Excerpts from the interview

On capacity constraints

The power sector has a requirement to double generation capacity from roughly 100 Giga watts to 200 Giga watts, and add transmission and distribution networks to match. A quantum increase in investment is clearly required.

Being a highly regulated sector, not surprisingly policies and regulations are playing a pivotal role in the development of this sector. As the Government realises the importance of private sector participation in the power space, it is imperative to improvise the tax incentives and liberalised policy changes for the sector in the forthcoming Budget 2010.

On tax holiday

The existing provisions of the Income-tax Act, 1961 provide for tax deduction of an amount equal to hundred per cent of profits and gains derived by an undertaking engaged in generation and distribution of power for 10 consecutive years subject to condition that an undertaking must begin to generate power on or before March 31, 2011.

In case the tax holiday is withdrawn, power projects commissioned after March 31, 2011 will get dearer by 5-6 per cent. With a view to attract higher capital investments and to keep the cost of power at affordable levels, it is advisable to extend the said tax holiday benefits for units set up till March 31, 2015.

On MAT woes

Despite the tax holiday, power companies are still ‘taxed’ under the Minimum Alternative Tax (MAT) regime. In light of the huge energy deficit faced by India and limited private sector participation, the Government should exclude power companies from the purview of MAT.

Therefore, the sector is expecting restoration of the earlier provision (under Section 115JA) wherein the profits of the undertaking engaged in the business of generation and distribution of power were also allowed to be reduced from the book profits for the purpose of calculating MAT. Similar concessions are expected from the new Direct Taxes Code wherein MAT will be inherited by Gross Assets Tax (GAT).

On funding

At present, Section 10(23FB) of the Act exempts income of a venture capital company / fund arising from investment in a venture capital undertaking which is engaged in the business of production of bio-fuels thus granting it a pass through status.

With a view to attracting more private investments in power sector, it is recommended that the benefit of pass through status should be granted to companies engaged in the business of generation, distribution and transmission of power.

On indirect tax issues

From an indirect tax perspective, rates of excise duty and service tax (which were reduced in the wake of slowdown) are likely to be increased in the forthcoming Budget. Any increase in the rate of excise duty would inflate the cost of setting up of non-mega power projects. In order to promote the non-mega power projects, it is proposed that indirect tax benefits available to mega power projects should be extended to non-mega power projects as well.

Services used by the power sector for setting up and maintenance should be exempt from service tax as in case of other infrastructure sector projects (e.g. construction of roads, ports, airport, maintenance of roads etc.).

Further, with a view to promote indigenous manufacturing of supercritical power equipments, customs duty and excise duty exemptions should be extended to Indian suppliers as available to mega power projects.

As regards Central Sales Tax (CST), in view of focused discussions on introduction of GST and concerted efforts of all the stakeholders, CST rate should be further reduced to 1 per cent (or even nil).

On matters of policy

As far as the policy matters are concerned, the Government should allow private sector participation in nuclear generation and to facilitate the same, either form a sovereign fund or give unlimited guarantees to take care of insurance liabilities in a case of a nuclear calamity.

Distribution reform should be another priority area for the Government and they should incentivise distribution franchisee or privatisation of loss-making distribution licensees.

On the renewable dimension

In line with worldwide trend it is quite evident that more and more share of new power generation capacity will be from renewable energy.

To develop the renewable energy sector in India, the Government should implement Renewable Energy Certificate trading as soon as possible and make necessary amendment in the Electricity Act to bring a uniform obligation (e.g. Renewable Purchase Obligation) across the States for procurement of certain portion of their power consumption from renewable sources.


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