IMPACT OF TAXATION ON THE INDIAN POWER SECTOR
18TH JULY, 2002 at Hotel Oberoi, New Delhi
EDITED BY PROF S L RAO
INTRODUCTION
Prof S L Rao opened the discussion by commenting that the subject was being
discussed for the first time in the power sector and follows the discussions on
viability of the sector at the last conference. This conference expects to make a
beginning in considering taxation in the power sector by analysing the total
impact of taxation in the power tariffs, the impact of taxation, tax incentives and
disincentives and how can investors, promoters and managers of projects
minimize their tax liabilities. In discussing incentives for example, we will look at
issues like accelerated depreciation that has a positive impact on cash flows and
profitability but frontloads the tariffs on customers. We found in the CERC that
income tax is a pass through item in power tariffs. It is estimated, and on a
quarterly basis. As a result, the generators make profit on tax because they get
the money in advance, and because it is estimated and not based on actuals.
CERC ordered that it should be done on the basis of actuals and the actuals
should be that of last year for the present year and the present year’s actuals
would be charged next year, with adjustments to be made each year for over or
under charging. As far as projects are concerned, only so-called mega projects
get customs duty relief on imported equipment. There are excise duties on local
equipment, countervailing duties, sales taxes and taxes on works contracts. On
fuels there are royalties on coal, gas, etc; hydro generation has a 13% free
supply to the originating state; there are varying rates of cess on captive
generation and on wheeling; customs duty on gas is ad valorem and with highly
volatile gas prices, has frequent additional increases due to the duties; there is
central sales tax on interstate movement of fuels; local sales taxes like the penal
22% on gas in Gujarat which has almost all the LNG terminals being established
there, giving Gujarat a chance to tax other consuming states; and of course there
are octroi and entry taxes. There is an indirect tax because of the transport
delays due to these sales and local taxes. There are also direct taxes to be
considered. On direct taxes, the issues of Section 10-23G of the Income Tax Act
on infrastructure benefits on gross income on interest, dividends, etc have to be
considered. The applicability of MAT to power sector is an additional burden.
Dividend tax, and the estimation of income tax as a pass through item are other
issues that must be considered. We do not expect to cover all issues in depth,
nor to come to conclusions in this first conference, but we do hope to develop a
plan for future work.
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Mr. P. Abraham, on the role of governments, said that traditionally power tariffs
were low primarily because of state policies. But despite all their inefficiencies, up
to the 1980’s many SEBs earned at least 3% on assets or even more. MSEB
was earning around 4-5%. In contrast, government has given NTPC a share
capital of Rs. 8000 crores on which interest is not charged. The dividend does
not match the cost of that capital. The Regulatory Commissions (RC) where
established are in some cases bringing in commercial attitudes. All utilities have
to improve their commercial and efficiency norms. But the Governemnt of India
(GOI) will have to share in a substantial manner, at least in the initial stages of
reform, in the losses of SEB’s due to social programmes. Governments are
diverting social expenditures to power subsidies. States are doing a great deal to
mobilize resources. But the Centre cannot put the full burden of the costs of
industrialization on the state governments alone. For example, the entire
agricultural sector is subsidized by them. Power has to be made affordable for
the agricultural sector. It is the duty of the GOI to ensure that the power sector is
taken care of and not treated as a sector to be supported only by the states.
Support need not be only in the form of cash subsidies but could be in the form of
incentives. But despite subsidies and incentives, tariffs are bound to increase in
the future. Mr S L Rao concluded that while the governments at the centre and
the state levels have many responsibilities, power being a concurrent subject, the
centre cannot distance itself from the responsibilities of sharing the costs.
Government needs revenues and there are limits to taxation. The central govt
has to share some of the burden with the states.
Fuels: Mr. O N Marwah said that taxation is used as a revenue tool by various
govts and state govts are using fuel as the cash cow to give more and more milk,
because they find that this is an area that they can tax heavily, with rising
revenues as prices of fuels keep rising. Power sector finds petro-fuels expensive
because they cannot recover the costs in the final tariff. The impact of taxation
on naptha, levied by the central and state govts comes to a maximum level of 3032% of the fuel cost and for furnace oil (FO) it is 30-35% of the fuel cost. The
price for FO is based on the concept of cost to product import parity in the
country. We refine 30% of oil from crude oil and the remaining 70% is imported.
The crude oil attracts customs duty of 10% + excise duty of 16% which is levied
on the refining process in the country. In addition there is sales tax levied by
state govts. The total impact comes to around Rs5480 in case of naptha and
Rs5600 in case of FO. The price is related to import parity of the fuel oil. The CIF
value of naptha is $ 219/ton and FO is $ 154/ton (appx.). Based on these prices
at which the fuels are imported, the indigenous price is fixed by the oil
companies. The CIF value is Rs. 10,900 for naptha and Rs. 7700 for FO. On this,
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10% import duty, marketing margins and profit of approximately 5% (Rs. 680 for
naptha and Rs. 500 for FO) are added. The differential freight from inland
refineries comes to Rs. 575/ton and Rs. 325/ton. Excise duty comes to Rs. 1840
for naptha and Rs.1600 for FO. Then comes Sales Tax levied by the state govts
varying from 11-20%. The final price of naptha comes to Rs. 18100 and FO Rs.
14000. Till now, ten power plants have been exempted from paying excise duty,
after the fulfillment of certain conditions. If others get this benefit the impact will
be 24-25%. If the sales tax which is as high as 20% is brought down to 10 or
15%, the cost of taxation on fuels will be around 15%. On exempting sales tax
completely, the impact of taxation will be 8-9%. This will significantly impact the
earning capacity of power plants and the viability of the projects will greatly
improve. The appetite of the state govts is not limited to sales tax. There is entry
tax levied in the states on fuels. VAT can be introduced in their place.
Prof S L Rao concluded that we need to estimate the impact on power cost of the
taxation on the two fuels, naptha and FO. What is the proportion of power tariff
which is accounted for by taxes? The suggestion that reducing or removing these
taxes will substantially reduce the tariffs and hence increase the viability of power
projects may bot be feasible. Instead we need to look at tax structure reforms
and the relative taxes. There is little scope for overall reduction as the govt needs
these revenues. But it should at the same time try to make it easier for the
consumers. Entry tax is a nuisance as it causes huge inefficiencies. The problem
of differential sales tax should be dealt with as it results in business moving away
from one state to another.
Mr. Gokul Chaudhary recognized that the energy gap is increasing and will continue
to increase for the next 25 years unless no singular measure is adopted to make power
affordable and reliable. Fuels are an important component in the energy chain and can
bring significant efficiency and competitiveness in the final cost of power. So far there
has been no comprehensive study as to how all the inputs finally translate into the cost of
power and that his organization is willing to commit time and resources for such a study
which will be useful to industry for lobbying with the states and central govts. In
Hydrocarbon Vision 2225, there is a mention about the widening energy gap and
the need for diversified and competitive fuel supply to ensure continuous
development of the economy. The regulatory and policy framework for the fuel
sector has to be such that it welcomes and attracts investment, both foreign and
domestic. It should provide a stable and progressive fiscal regime that sustains
the well being of all the stakeholders, the investors, the consumers, the govt. and
the economy at large.
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Gas, given this system’s evolutionary nature and its competitiveness, needs
special attention. This govt. in its vision statement last year has recognised
natural gas as the preferred fuel of the future. It recognises the need for natural
gas transported via both pipelines and LNG tankers. We need to analyse
whether the present legislative and regulatory framework delivers the desired
results i.e. delivery of natural gas as the competitive fuel for the power sector in
India. The vision statement does talk about medium and long term measures
which are indeed noble in intent but need to be translated into reality by
implementation. These measures include the seriousness about allowing a level
playing field for various gas suppliers and the rationalisation of duties and tariffs.
At the time of import, customs duty is loaded in the CIF value of the fuel. CIF
value is typically FOB, insurance and freight. Since purchases are on FOB, there
is a mechanism to add the rest to evaluate CIF value on which the custom duty is
levied. It ranges from 10-30%. This is compounded for the energy gas business
with significant sales tax, as in Gujarat where most of the LNG terminals are
being placed. At the beginning of the chain there is the development and
production of fuel in the resource country. This culminates for LNG in the
development of liquefaction facilities at the export terminals at the resource end
itself. LNG as a commodity requires cryogenic tankers for shipment, followed by
LNG unloading and storage facility at the market location, followed by regasification and pipeline grid to the burner tip. Whichever the fuel, energy
component in the fuel chain requires significant capital outlay and its
development requires coexistence of all other components simultaneously
combined with the customers’ facilities.
Indian fiscal and regulatory framework directly impacts the chain right from
shipping, all the way to the customer and beyond. This includes custom duty at
the time of importation. Excise duty is added as a countervailing duty. There is
Sales tax on the subsequent sale in the country and finally there is corporate
income tax on the operating entities in India. The entire chain is inter-dependent.
Indian fiscal and regulatory framework has a tremendous bearing on the entire
chain and its sustenance. While different ministries and departments of govt of
India continue to evaluate and legislate different laws specific to their business
which falls under their administrative control, there needs to be an overall
understanding of the impact of every component in this chain. Hence, an
isolated approach whether by power ministry, shipping or petroleum could yield
detrimental impact on the business. It is important that there is an integrated
policy, which addresses all these segments including the fiscal measures that
need to be implemented. Specific to the power sector, govt. has historically
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provided some incentives. These include corporate tax holiday, somewhat
mitigated by MAT, infrastructure status which provides for certain financing
incentives and customs duty reliefs on capital goods. However, taxes continue to
constitute a significant part of the fuel price. High taxes have a cascading and
adverse impact on the growth potential of the economy, as it affects affordability.
Therefore govt. needs to rework the fiscal framework to ensure the price of
potentially significant natural gas. It is not to be loaded with taxes. Govt. should
seek benefit from greater tax collection generated due to correspondingly greater
economic activity which comes from affordable, rational fuel prices.
In Gujarat the sales tax is 22%. This means tax cost of US$ 0.7 – 1/MMBTU
assuming that the regasified LNG is ranging from US$ 3-4/MMBTU. Such a high
tax cost is prohibitive, specially as the natural gas anchors around the power
sector which is already struggling with low affordability issues, merit order
dispatch coupled with the fact that sales tax cost, while it is added into the tariff is
not really passed through as in the tax regime, to enable the consumer to take
credit for it. The change over to VAT is not expected to bring any relief because
States have indicated lack of a credit mechanism for natural gas since electricity
is not VAT’able. The VAT on natural gas, which will be imposed on the final cost,
will move into the tariff and not be a pass through change available to the
consumer of the electricity. Government of India should recognize that fuels are
of national importance and significance and classify them as “Declared Goods”,
so that state govts. Cannot levy sales tax exceeding 4%
In addition, once VAT is implemented, electricity should be given the status of
zero VATed good so that all taxes paid till that day can be clawed back.
Import terminals and pipelines are integral to the development of the energy
sector. These are enabling infrastructure. They require equal fiscal treatment as
any other infrastructure. Recognition as infrastructure would mean lower
customs duty at the import of capital goods for the creation of these facilities.
Currently, the effective rate of customs duty on the import of capital goods is
15%. Effectively, reducing the rate of customs duty to a more rational level
would mean that the cost of regasified LNG or pipeline tariff will come down.
Giving infrastructure status to import terminals and pipelines would mean
lowering of the financing cost for the development of these assets. Investors will
enjoy tax-free income from their contribution in the creation of these businesses.
Other infrastructures including power sector do enjoy this holiday.
Mr. S.L. Rao added that any tax suggestion must also take a look at what the
impact will be on the tax revenues and the alternatives for revenues to be made
up. To this Mr. Gokul Chaudhary responded that the import of natural gas,
whether by pipelines or by tankers of LNG, will be an addition to the existing
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volumes. Therefore govt. will not be a net looser. Mr. O.N. Marwah added that
the impact on increased production by lowering taxes must be borne in mind.
Ms. Sujatha Srikumar said that taxation is a critical area in the power sector and
there is need for rationalization, logic and a rational approach. Mr. S.L. Rao
concluded that we need a national fuel policy, a taxation structure that
reflects the country’s priorities between fuels and these priorities would obviously
also include the environmental impact of different fuels. Mr. O.N. Marwah
Power suggested that just as some state govts. have exempted certain
industries from payment of sales tax of 15% so that the states are able to grow,
why not the power sector be exempted for a certain period say 5 years from all
taxes? Revenue loss can be compensated with the increase in production and
industrial activity.
Ms. Sandra Shroff said that China charges industries pays Rs. 2.50/unit for their
electricity while in Gujarat the rate is upto Rs. 5. and at this rate, availability and
quality, industry will relocate. Mr. S.L. Rao
said that manufacturing in the
contribution to GDP has been static in India at around 15%, while in China it is
around 24%. At the same time the Chinese pricing is a very opaque system and
from all the reports on China manufacturing there is a differential cost of power
itself.
Mr. Shyam Wadhera said that there are major cost elements which are impacted
by taxes and duties and are related to capital cost i.e. the return on equity.
The taxes and duties which impact the capital cost are customs duty, excise
duty, sales tax and withholding tax. On customs duty, the power plant equipment
is subjected to 28.1% which includes 5% basic duty and 60% countervailing duty.
In terms of the installed cost, the custom duty impact is Rs. 5.4 crore/MW, which
translates into per unit impact on price of 16 paisa. Then we have the sales tax,
with different states charging sales tax on machinery and equipment procured for
the power sector. Haryana State Electricity Board has extended concessional
sales tax of 1%. These facilities are not available with the other states. This can
be considered by the other states also.
Next is withholding tax, the impact of exemption on withholding tax, income tax
on interest payments on external commercial borrowings is also a significant
element. The withholding tax rate is 20% and 8% interest rate for loan which
grossed up becomes 10%. Then we have the taxes on fuel, LNG, attracts the
basic custom duty of 5%. On coal we have a duty of Rs. 3.5/MT which
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translates to Rs. 0.23 p/kwh. On Naphtha we have a duty of 16% which
translates to Rs. 0.40 p/kwh. Initially, an exemption was given to seven power
stations after which NTPC approach the govt. and extension was given to
NTPC’s gas based power station (Naphtha). We have been able to convince the
govt. to withdrawn excise duty on Naphtha for the LNG fired stations of NTPC.
On sales tax, different states are charging different sales tax rates on fuels used
in power sector. For coal it is 2% (Rs. 1.15 /Kwh) in UP, in MP it is 4% (Rs.
2.30/Kwh), for gas, the sales tax charged in Rajasthan is 4% (Rs. 3.12/Kwh) and
in Gujarat it is significantly high 22% (Rs. 17.80/Kwh). For Naphtha, it is 4% (Rs.
8.38 / Kwh) in Rajasthan and 17.6% (Rs. 36.7/Kwh) in Gujarat.
In addition to sales tax the states also levy royalty on the coal mines within the
state and supplied to power stations. The rates vary for each state and are also
different for each grade. Also royalty is charged for gas supplied to power plants.
On coal, rates for royalty vary from Rs. 50-95/MT which translates into Rs.
6.38/Kwh maximum. On gas the royalty is Rs. 212.70/1000 SCM which
translates into Rs. 4.41/Kwh.
Other taxes and duties impacting the power utilities are dividend tax and duty
on electricity. The dividend tax outflows on account of tax on dividend paid to
govt. impacts the internal resource generation of companies like NTPC which
plough back their profits for capacity additions and debt servicing.
State Electricity Duty (SED), is another component affecting the cost of power
to the consumer. There is no uniformity in SED levied by the State govts. The
govt. of AP & MP are levying excise duty on the sale of electricity outside the
states. In 1992 NTPC had filed a case with the High Court against the levy on
sales outside the states. The High Court decided that inter state sale of
electricity should not be taxed by the state govt. where the power station is
located. Ultimately a constitutional issue was taken to the Supreme Court and
the Supreme Court has upheld the decision of the Andhra High Court saying that
states cannot levy duty on electricity generated within the state but sold outside
the state. The impact of electricity duty has considerably reduced after Supreme
Court’s decision, which is limited to AP & MP only as far as NTPC is concerned.
It was 3 paisa in MP.
Water Cess: There are different levels of water cess in different states. We
have noted an interesting tendency of the state govts. with central power
stations. When NTPC is establishing a power station, we get lot of support and
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concessional rate from the states govts. but once the power station is established
then rates at which the water is given to us are substantially hiked. In MP, it was
hiked to almost 100 times the rate we got when we started the project. We need
a uniform policy which allows reasonable rates to be charged by the state govts.
Recommendations of Mr Wadhera, NTPC
 Imposition of various duties and taxes by the states needs to be reviewed,
considering the multiplier effect on the power tariff and economy. The benefit
of customs duty exemption for mega power projects should be extended to all
power projects for a limited period, may be 5/10 years till we are looking at
major capacity additions in the country.
 Deemed export benefit to domestic suppliers available to for mega power
projects should be extended to all power projects it is important to state govts.
need to be persuaded to exempt fuel (specially liquid fuel) for power plants
from levy of sales tax, cess and royalties which are adding to the cost of
generation.
 State Governments need to be persuaded to exempt fuel for power plants
from levy of sales tax, cess and royalties which are adding to the cost of
generation.
 All LNG terminals should be given a status of infrastructure project and
thereby allow customs duty to be levied at the concessional rates
 Liquefied Natural gas may be included in declared goods so that local sales
tax is subjected to a ceiling of 4%.
 Tax exemption on earnings of financial institutions from interest income from
power projects could result in reduction in interest rates.
 The power generating companies may be exempted from Income Tax.
Alternatively, exemption under Section 195A of the Act may be considered to
avoid tax on tax. Deemed export benefit is available to the Indian manufacturer only
in a limited sense when they are importing raw material when the project is funded by
World Bank or ADB. These benefits should be extended even if the project is not
funded by World Bank and even if there is no actual export.
 Mr. P.S. Bami added that mega power projects are exempted from customs duty.
LNG terminals have no customs duty but if you want to put up a merchanting LNG
station which will supply LNG to various consumers, customs duty has to be paid.
For independent LNG it is 25% and LNG terminal for captive power is 5%. The
excise duty is 16%. An independent LNG station which is not captive to a particular
fertiliser or any power company, ultimately pays duty of 21.8%. Income tax is a pass
through as it is recoverable from the consumer but is treated as an income and again
taxed. The actual income tax comes to 8 paisa /KWH and the tax on tax is 5
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paisa/kwh, so that the total impact is 13 paisa / KWH. Important fuels should be
declared as “Declared Goods” so that nobody can charge more than 4%. Gas has
unjustified wide variations in sales tax from one state to another. In Gujarat it is
17.6% (Rs. 36.07/KWH) and in Rajasthan it is 4% (Rs. 8.38/KWH). When the same
gas goes to fertilizer industry we want to subsidize it and reduce the prices. Gas as a
fuel should be treated at the same level for power industry as well . The prices of
Naptha in NTPC’s case alone vary from 2.5% to 17.6%. The impact is 20
paisa. Naphtha is free of customs duty when used for fertilizer industry but for
power 10% is charged. On HSD excise duty of 14% is charged and additional
excise duty of Rs. 1000 per Ltr. is charged. It should also be free for power.
West Bengal charges rural education cess of 20% of the coal value and
primary education cess of 5%. The coal that reaches power plants is of lesser
grade than what is declared. Even if power pay as per the actual category of coal
received, the royalty is charged as per the declared quality of the mine. The
difference can be between Rs. 50-95 per ton.
Producers’ price of gas at Dadri is Rs. 2016 per 1000 SCM. Consumer price is
Rs. 2850 per 1000 SCM. Transportation charge by the time it comes to Dadri is
Rs. 1350, almost 50% of the producer’s cost. There is 10% royalty, tax of
Gujarat Government on gas as produced, additional tax of 10% on the sales tax,
entry tax, local sales tax, turnover tax, surcharge on the turnover tax and again
sales tax varying from 5 – 22%. The total impact of all these taxes (92 paisa
variable charge) is approximately 15-20 paisa which is the constituent of taxation
alone.
Mr. R. Krishanmurthy considered the vagaries in the Indian Income Tax Act
and its effect on the cost of borrowings and the impact on power sector.
Withholding Tax (WT) which was available on foreign borrowings was withdrawn
by GOI last year. We are hence not able for example, to take advantage of the
historically low cost of Japanese Yen which is prevailing today. There is always
a grossing up of 20-25%. If we are able to get an all-inclusive cost of 5%, the
grossing up of 22-25% increases the cost. Only where we have ECA credit
facility or double taxation avoidance agreements, the incidence of taxes can be
lower.
External Commercial Borrowings have been a good instrument for financing of
a project. ECB made prior to June 2006 will continue to enjoy the benefit of WT
exemption u/s 10-15-4F. PFC took up this issue with GOI and expanded the
scope of definition of interest by way of explanation u/s 10-15-4 explanation 2,
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which provided that the expression of interest includes hedging transaction
charges under currency fluctuation. With the removal of this section if we do
hedging transaction with the foreign bank that does not have a place of business
in India we have to pay to WT. It eliminates the scope of our getting finer rates.
This anomaly has to be corrected.
Power companies are enjoying tax holiday u/s 80-IA. There is a provision of 10
year tax holiday under income earned by power companies from a new project.
But this provision does not give benefit to the investors investing in the equity
and taking risks. The company gets the benefit. On the contrary the investor has
to pay dividend tax, if he is getting dividend in the first year. To improve
investments and to achieve our target of an additional 100,000 MW this provision
must be extended to individual investors. The govt. has already removed the
provision of tax free bonds which are available from 1984-92. In 1992 the
allocation of tax free bonds was restricted to railways, telecom and housing
sectors which was later gradually withdrawn. Except 54 EC of the REC and
other institutions u/s 80-IA, no other institution or infrastructure is getting the
benefit of tax free bonds.
Since the introduction of section 10-23G, PFC has been analysing projects and
giving benefit directly. After the subsequent amendment it is made compulsory
that the project authorities have to get approval from the CBDT. Normally the
approval is given for three assessment years. The exemption should be given for
at least as many years as in gestation period or upto 2006 as per the Act.
Getting approval delays the benefit further. PFC is the only financial institution
which is giving 1% tax in interest rebate for projects covered u/s 10-23G. We get
the benefit of 0.70% in tax computation which we are passing by 1% reduction to
projects covered u/s 10-23G. MOP must decide which project should come u/s
10-23 G instead of keeping the power with CBDT, since MOP is a nodal ministry
having all the technical expertise.
Even though it is mentioned in section 80-IA read with 10-23G, that all T&D
companies are eligible for getting the benefit, no T&D project has been approved
u/s 10-23G. Power sector must be seen in totality. Generation cannot stand
alone without T&D. So the spirit of the act should be extended to all, be it
generation, transmission or distribution. For this, procedures have to be stream
lined. This will have a great impact on the final tariff.
New instruments like tax paid bonds should be introduced. Just like dividend is
paid on the tax at the time of declaration of dividend, at the time interest is
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released to the investor, the tax can be recovered at an agreed percentage, say
20%. If this is introduced the hassles of an individual investor of going and filing
returns is reduced and he gets a tax free income where the company paying the
interest pays the tax and GOI gets the entire amount at one time.
Vidyut Vikas Patras should be introduced. In next 10 years Rs. 900,000 crores
need to be invested to achieve the target of 100,000 MW as per the Udesh Kohli
Committee. Just like Indira Vikas Patras which helped to reduce the total deficit
of GOI, if Vidyut Vikas Patras are introduced, it will bring in investment and hence
improve the economy. The power companies should be allowed to invest in
bonds u/s 80-IA, 54-EAC.
Just like power companies, the financial institutions that are financing power
projects can also be given tax holiday u/s 80-IA. Ultimately it will help to reduce
the cost of power and the financial institutions will also be able to give lower rate
of interest. Similar benefits should also be extended to the lenders. In the
hydropower sector in the initial years the tariff is high and it tapers down over a
period of time. Such projects should get long term funding. PFC and Power Grid
have made a dent in the market by providing an average period of 10-12 years, a
fifteen year paper repayable from 7th year onwards and average period of
maturity of 10 years is coming. For the first time PFC has done a transaction
with a bullet of 15 years of about Rs. 200 crores. Another suggestion is that if
the depreciation is less than the loan repayment due in the initial year, the tax
provision can be modified so that the depreciation is higher. This will facilitate
cash flows in the initial years of the project commissioning and reduce the tax
liability which is a pass through cost.
For mega projects imports are allowed without duty payment. This customs duty
exemption should be extended to all projects. Another experiment is to allow
deferred duty on import by power companies. The same can be payable after
the project successfully runs 5 years. This can reduce the funding requirement
and interest cost in the initial period.
The import duty for gas based projects is 20%, while spares attract duty of 5052%. For renovating old projects this unnecessarily increases the cost. Spares
should be charged with lesser import duty than the project import. Full
exemption from customs duty for next 10 years sales tax, excise tax, works
contract abolition for specific projects, can be thought of. The loss of revenue
can be made up by higher industrial output with lower tariffs. A back end levy
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after 10 years can be considered. The time limit of exemption of WT u/s 80-IA
should be increased to 2012.
Ms. Saroj Punhani said that to reduce the cost of power ways of reducing the
cost of inputs must be examined. The various issues taxation can have incidence
on our capital equipment required for power project, supplies coming from
abroad or in house, financing and income accrued by the power companies.
Even if it is a pass through it has an effect on the tariff which is ultimately borne
by the consumer. From the developers point of view, duty free import should be
extended to all the items related to a project, EPC contracors/sub-contractors,
which will have an ultimate impact on tariff. There should not any WT on the
financial borrowings. Exemption of stamp duty by state govts. can also bring
down tariff significantly. For example, in Hirma project the stamp duty alone was
Rs. 400 crores. There are a lot of grey areas in the provision of income tax. If a
contractor has a branch office in India and is importing form outside, the entire
income on that account attracts lot of taxes. If it is a lumpsum turn key project, all
the supplies and engineering designs are not defined separately, it again attracts
taxes. It is desirable from the developers’ point of view that the income derived
from the contractor on CIF value of supply of goods from outside India should be
tax exempt. If the R&D cess can be waived or addressed in a treaty with a
particular country this, this will bring down the cost.
Mr. R. Krishnamurthy offered to study the incidence of tax on tariff and to
undertake case studies of two/three projects which are under the process of
commissioning, have been commissioned or are just starting, to see the
implications of various tax clauses. PFC can finance and outsource a good
agency, putting the recommendations before the govt. and regulatory authorities.
Hedging cost has been a bone of contention between power producers and
regulators. Now CERC has agreed to allow part of the hedging cost to be inbuilt
in the tariff.
Mr. Seth Vedantham said that if there is reduction of customs duty, domestic
manufacturing will suffer. It is not the tariff that matters to the govt. but the
preference of domestic fuels over imported fuel. Why should there be less tax on
mega power projects? For big projects, Govt. has given 10 years tax holiday and
with depreciation for 4 years, 14 years is enough time to structure the tariff. For
India, main fuel is coal. The customs duty on LNG is 5-10% but the basic cost is
high. India cannot afford costly fuels. Tariff has to be low. There is no need for
national fuel policy because it is the competitiveness for a better tariff that will
determine the cost of power.
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Prof S.L. Rao said that the logic for having a national fuel policy is that taxation
can be used by govt. to promote or dissuade the Indian industry from going for
one fuel or another. But the govt. today has neither a national fuel policy nor
has a taxation policy which is coordinated between the fuels. Therefore, it is
essential to have both. There are fuels we might like to encourage, and in an
open market prices cannot be influenced except by taxation. So taxation as a
part of national fuel policy is essential.
Mr. V.S. Ailawadi said that the average consumer tariff in 1992-93 was 128
paisa/KWH which has now increased to 303 p/KWH. The interse cost amongst
consumer categories is increasing. The power purchase cost in 1992-93 was 76
p/KWH, 1999-2000 166 p/KWH and in 2001 it is 184 p/KWH. One of the
important factors for higher power purchase costs is higher fuel costs. The fuel
element which constituted higher fuel cost was 33 paisa in 1992-93 which has
gone upto 50.59 paisa in 2001. For this one of the reasons is taxation. Another
factor is higher depreciation rate which was 9% in 1992-93 and now is 19.8%.
Interest payment is also one of the factors. It was 22% in 1992-93 and is now
38.98%. The power purchase cost has increased from 27.9% in 1992-93 to
48.5% per unit. The cost of fuel in coal based thermal plant per KWH has
increased from 53 paisa to Re. 1.Fuel prices and duty structure are a key to
controlling power prices. We should try to achieve a suitable framework to
promote and increase the percentage share of hydro power. This can bring down
the cost of power. We should also ask for a review of taxation structures. Duties
and taxes have cascading effect and reflect in the cost of power. Commercial
orientation of SEBs is very crucial. Unless SEBs become efficient, no measure
or concessions can help. Distributed generation can also help in cost reduction.
Mr. P. Bhullar said that taxation structures play a key role in investments by
affecting returns. Tax on dividend and distribution is a matter of concern. Debt
equity structure plays a major role in IPP funding. Funding of IPP projects is on a
non-recouse basis and entire cash flows come from the project cash flows. We
need long term debt that goes upto 14-15 years. Any investor would want to
make his investment secured and be levied with minimum taxes. Section 10-23G
is one of the initiatives undertaken by the ministry. Under this section
investments from infrastructure capital fund or company / cooperative bank made
either in the form of shares or long term planning in enterprises / undertakings
which qualify as under section 80-IA (4) or 80-IAB, for computation of taxes the
dividend interest in terms of long term capital gains earned out of these
investments is not included in the total income. Key issue is that from April 1,
2003 the income by way of dividends u/s 115(O)would also be included in the
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total income. The provision that stands as on date does not exempt Section
115(O).
Mr. P.N. Krishnan focused on Section 10-23G. He argued that Section 14-A should be
amended so that the benefit goes to the deserving party. By the action of financial institutions
the whole purpose of Section 10-23G was failed. If the financial institutions want to avail the
benefit, they should affect necessary reduction in the interest rates to the IPPs. Although
today the prevailing rate is 10-11%, many IPPs are still paying at 20%. On one hand IPPs
have to face a continuous cry from Electricity Boards to lower the tariffs, and on the other hand
Section The Finance Ministry should to get back Section 10-23G and make it operative as it
was originally intended to be. Effectively it should make the cost of borrowings lower for
generating companies by allowing a 100% tax break on tax exemption earned by the lender,
provided the benefits are passed on to the borrower. There is no point in advancing money at
16% and getting tax exemption on such a revenue. It should be made mandatory for the
lender that the benefit of tax exemption should be passed on to the generating company, either
in form of lower interest rate or rebate. Only PFC is diligently following the practice of passing
back the benefit. PFC clearly states that if there is Section 10-23G benefit involved, they will
give 1% rebate. If it is not so the interest rate is 1% higher.
The same logic holds good for MAT. Under the two part tariff mechanism for the computation
of income tax, it is grossed up for determining the passing up of liability of the Electricity Board
to the generating company to ensure that the return on equity is on net on tax basis i.e. 16%.
The applicable rate for MAT is 8.25%. It gets grossed up and the impact comes to 12% in the
form of tariff to the Electricity Boards. This is again passed on to the customer or the
government in the form of subsidies which the Electricity Boards collect from the govt. 85% of
the money collected by the center is passed back to the states. So the state pays the net MAT
at a very high premium to collect that 85%.
Recommendations by Prof S.L. RAO
Although we have an exhaustive list of innumerable taxes, we do not know the impact
of all these taxes in different parts of India on different types of power generated.
Various companies present at the conference have offered their support to establish a
working group to discuss and analyze the impact of taxation on the Power sector.
Fuel is an important component in the energy chain. In India taxation on fuels is very
heavy and should be brought down. Our govt. needs to rework the fiscal framework.
Sales tax is the ‘bug-bear’ for LNG and the entire gas business. Tax costs are loaded
into the tariff. The consumers cannot take the benefit even though it is being paid for in
the energy chain. India is not ready for VAT. VAT needs to rationalise the impact of
sales tax. A group of public finance specialists have studied VAT and found out that
many states are not ready for it. If they introduce VAT many states will suffer tax
losses.
Concern was expressed about the urgent need for a National Fuel Policy and reforms in
taxation structure to look at the differential between various states and attempt for a
harmonisation of rates of sales tax between the states. The states which have high
rates are putting themselves at disadvantage. For example, Gujarat is killing industries
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with extremely high level of taxes on Naphtha and Gas. It was pointed out that in China
industrial power costs Rs. 2.50 and in Gujarat we are paying Rs. 5.00. If the cost of
power is not brought down India can never be a manufacturing country.
Govt. at the Center should realise that fuels are of national importance. Particularly
naptha/gas should be declared as “ Declared Goods” and therefore subject it to only
CST rate of maximum 4% rather than continuing with 22%. Electricity must be treated
as zero rated goods so that all taxes paid up to that point can be claimed back.
SEBs are bearing the burden of development of the power sector. The Central Govt. has
to share this burden. Import terminals and pipelines must get equal fiscal treatment.
They should be recognised as infrastructure facilities and get lower customs duty.
There is need for improvement in efficiency of tax collections at all levels. A way must
be found to bring in a modified VAT instead of sales tax to exempt customs duty on
crude oil for power generation. Giving a specific duty exemption to crude oil for power
generation is worth considering, as there is no question of leakages. A sales tax
holiday for 5 years for new power projects might also be examined.
The total impact of taxes, in case of coal is 23.2 paisa / KWH, incase of Naphtha 67 paisa
/ KWH and in case of gas we get a variation of 25 paisa to 43 paisa per KWH. Exemption
of customs duty to mega power projects is a little illogical because mega power
projects are by definition lower cost projects. Exemption of customs duty should be
offered to power projects as a whole. Deemed export benefits should be extended from
mega power projects to all power projects. States should be requested to exempt fuel
from sales tax and electricity duty for power plants, including transmission and
distribution. At least these taxes should be exempted for a minimum period of 5-10
years to enable quick capacity addition.
Withholding tax on external commercial borrowings was withdrawn last year. This does
not make any sense as nobody can take its advantage. Regarding tax incentives the
retail investors should get tax holiday benefit made available to them as it is available to
power companies. 10(23G) benefits should also be made available to retail investors.
Hedging cost should be allowed for tariff (to which CERC has now agreed). Stamp duty
is a major cost in new projects; eg., in case of Hirma Project the cost of stamp duty
alone was around Rs. 400 crores. Stamp duty exmption should be considered. R&D
cess on development and design form O&C might be waived off. Exemption of MAT for
projects subjected to tax holiday needs to be made. 10 (23 G) is available to only those
projects which are commissioned before March 2006. Hence the existing projects may
not be able to take its advantage.
When government or Power Minister says that we need to reduce the cost of power, it
should be pointed out that the existing taxes and levies are responsible for high costs
of power. Therefore various ministries and Chief Ministers of States must together and
in a holistic and coordinated way work out a better taxation structure. PFC, NTPC, Ernst
& Young, J Sagar Associates, Bina Power offered their support to IPPAI to form a
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working group to analyse the impact of taxation on the Power Sector and what reforms
are needed in the present taxation structures.
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