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Union Budget 2012-13: Impact on the Power sector

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Union Financial Budget 2012-13 | Impact on the Power sector

03 | An overview 04 | Key expectations 05 | Direct tax proposals 06 | Indirect tax proposals 09 | Our offices

Union Financial Budget 2012-13 | Impact on the Power sector

An overview

The journey so far

The Power sector is one of the most critical growth drivers for the country. In order to provide adequate support to countrys growth aspirations, it is imperative that the sector scales its power generation capacity up and push reforms in areas such power and distribution losses. From 2011 to 2016, the overall power generation capacity of India is projected to increase by an annual average rate of 6.76%, which indicates towards the level of 1,316 terawatt hours of power generation. The net power consumption, during this period, is expected to reach 1,021 TWh by 2016 from 729 TWh as registered in 2011. Renewable energy will play a key role for the sector indeed. However much needs to be done to realise the true potential of renewable energy sources. As per industry estimates, Indias solar power generation potential is close to 5,000 TWh per annum, however the initial cost of set-up acts as a major detriment and therefore the generation and utilisation of solar power is far below its potential. The same stands true for wind energy as well.


As per the recent reports from the government, India in order to sustain its plus 8% growth rate until 2030 requires its power supply to be ramped up by more than four times of the current levels. While it is a challenge to ratchet up power generation, the sector continues to suffer transmission and distribution (T&D) losses as high as 25-30%, on the other hand.

India comes up as a global leader in terms of hydro-electric power generation. It represents 17% of the total installed generating capacity placing the country as the sixth largest producer of hydro-electric power. Along with solar and wind power, India has set ambitious targets to utilise nuclear energy sources as well. Earlier in 2009, the government announced its plans to generate 470 GW of nuclear energy by 2050, thus opening doors of huge opportunities in the sector.

Union Financial Budget 2012-13 | Impact on the Power sector

Key expectations

Direct tax expectations Extension of tax holiday

Indirect tax expectation

The terminal date of availing deduction for the undertaking engaged in business of generation and distribution of power, transmission and distribution of power by laying network of transmission and distribution lines, undertaking renovation or modernization of existing distribution lines expires on 31 March 2012 and considering the importance of this sector, there has been lobbying for extension of the date for availing tax benefits.
Availability of low cost funding

Facing the challenges of high capital investment and interest cost, the sector expected indirect tax benefits along with concessions and exemptions for plant and equipment required to set-up solar and wind power projects. The industry also expected relaxation in import duty to bring down the input cost involved in buying equipment, which are mainly available in the Western countries.

Considering the pressurised margins, the sector had been expecting some avenues to access low cost funds
Power sector reforms

The sector expects speedy and swift approvals for power projects as well as favourable implementation policy

Union Financial Budget 2012-13 | Impact on the Power sector

Direct Tax proposals

Extension of sunset clause - power companies

The terminal date of availing deduction for the undertaking engaged in business of generation and distribution of power, transmission and distribution of power by laying network of transmission and distribution lines, undertaking renovation or modernization of existing distribution lines is extended from 31 March 2012 to 31 March 2013
Additional depreciation to power companies

Relaxation on the rate of withholding tax on interest on overseas borrowings

Tax shall be charged at the rate of 5% on any income of a non-resident (not being a company) or a foreign company by way of interest on foreign current borrowings from sources outside India between 1 July 2012 and 1 July 2015 by companies engaged in generation, distribution or transmission of power. This amendment will take effect from 1 July 2012

It is proposed to extend the benefit of additional depreciation to taxpayers engaged in the business of generation or generation and distribution of power This amendment will take effect from AY 2013-14 (FY 2012-13)
Accessibility to overseas funding

ECB is permitted to be used for part re-financing the existing Rupee debt of power projects

Union Financial Budget 2012-13 | Impact on the Power sector

Indirect tax proposals

Budget scenario

Central Excise

The Power sector appears to have been optically put at the receiving end of the Budget especially from an Indirect tax perspective. However, an increase in the CENVAT buildup with no potential avenue for utilization of such credit coupled with the increase in Cess on crude oil could very well see the common man bearing the burden of the Finance Minister's favours to this sector.
Service tax

Basic rate of duty increased from 10% to 12% and merit rate increased from 5% to 6%. This may result in higher CENVAT credit build-up A concessional rate of Excise duty/ Countervailing duty of 1% on steam coal has been prescribed subject to conditions prescribed In the interest of energy conservation, Excise on Light emitting diode ('LED') lamps is reduced to 6% from 10%

rate of Service tax is proposed to be increased from 10% to 12% that may result in an incremental cost of electricity generation introduction of the Negative list concept under negative list approach the following services are proposed to be exempted from service tax: - transmission or distribution of electricity by an electricity transmission or distribution utility

Customs duty

exemption from basic customs duty ('BCD') Natural Gas and Liquefied Natural gas for power generation while the Customs duty exemption continues for equipment imported for mega power projects and ultra mega power projects; the project import rate of Customs has been increased from 21% to 23% on equipment imported for Non-mega power projects exemption from Additional Customs Duty on import of equipment for setting up a Solar thermal project

Union Financial Budget 2012-13 | Impact on the Power sector

Indirect tax proposals

Customs duty

BCD exemption has been provided on - Steam coal (used in thermal power plants) for two years up to 31 Mach 2014 - Uranium concentrate and sintered Uranium dioxide pellets for generation of nuclear power - specified coating chemical used in compact fluorescent lamps BCD has been reduced to 5% on - solar lanterns or solar lamps - raw materials required for manufacturing parts of rotor blades for wind energy generators BCD has been reduced to 7.5% on pipes/ tubes for boilers subject to conditions prescribed

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