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| 2Achieving Fiscal Advantage for an Efficient Energy Chain

Presentation on

ACHIEVING FISCAL ADVANTAGE FOR AN EFFICIENT ENERGY CHAIN

11-12 December, 2007 | India Habitat Centre |Thermal Power India 2 Conference | India Core | New Delhi |

aSujit Ghosh, Executive Director BMR & Associates

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Part I: Background

Part II: Investment norms – Energy sector

Part III: Policy

Contents

Part IV: Tax holiday and other fiscal incentives

Part V: Way forward

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Need of power for India

Part I: Background

All rights reserved | 5Achieving Fiscal Advantage for an Efficient Energy Chain

Background

Why do we place so much importance on power sector ?Sustainability of our long-term economic growth is criticically dependent on our ability to meet our energy requirements of the future

When a country of the size of India begins to grow at the rate of 9 percent per annum, with the prospects of even higher rate of growth, energy becomes a critical issue

India's energy requirements – A few simple truthsPower sector in India is at a critical stage of development

Need for enhancing power generation capacity from all known and likely sources of energy (thermal (including domestic and imported coal), nuclear, hydro and other non-conventional sources)

Has to be affordable in terms of ‘financial cost’ and ‘environment’

Target of adding about 41,000 MW during the Xth Plan (i.e. FY 2002-07)

Target of adding 60,000 MW by the end of the XIth Plan (i.e. FY 2007-12)


Background (Contd.)

India's energy requirements – A few simple truths (Contd.)Achieved only 21,180 MW during the Xth Plan, - Traveled half way mark only !

XIth Plan target has been revised to 78,500 MW.- A huge challenge lies ahead !

Nuclear based electricity generation target of 20,000 MW by the terminal year of 2020 (with a potential to double with international co-operation) – Wishful thinking !

Way forwardNeed to remove uncertainties in order to overcome the shortfall in power generation

Pave way for India to benefit from nuclear commerce without restriction

Create an enabling environment for industry

Boost private participation

With a high growth rate of the economy and slower growth rate in capacity addition, the power sector needs to speed up to meet the XIth Plan targets –

Can India afford to miss these targets once again?

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Part II: Investment norms

Investment in India’s Energy sector


FDI norms 100 percent FDI allowed under the automatic route for Power including generation (except Atomic energy), transmission, distribution and power trading

Electricity Act, 2003No requirement for license for generation

Captive power plants free from any licensing

Competitively bid generation tariffs

Open access in distribution to be introduces in phased with consumers above 1 MW getting the right to open access by January 2009;

Private investment in transmission through licensing by Regulatory Commission

Multiple licenses in distribution

National electricity policy announced in 2005

Investment in India’s power sector


FDI norms FDI investment in Atomic Energy is prohibited

The Atomic Energy Act, 1962

The Central Government has the power to produce, develop, use and dispose of Atomic Energy either by itself or through any Authority or Corporation established by it of a Government Company and undertake research

To buy, acquire, store or transport any prescribed or radioactive substance likely to be required for production, development or use of Atomic Energy

Outlook India has commenced involvement of private companies (on an ‘outsourced model’basis) into exploration and mining of uranium

Necessary changes being contemplated in the Atomic Energy Act, 1962 to allow private participation in nuclear power (Timeframe to be defined)

Investment in India’s atomic energy sector

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Part III: Policy

Existing mega power policy (Excluding Atomic Energy)


Mega power policy

IntroductionTo provide impetus to the development of large size power projects in India and derive benefits from economies of scale Mega Power Policy (‘MPP’) was introduced in November 1995

With evolving economic environment, the policy was revised in 1998

Ministry of Finance liberalised the policy further by a notification, making mega power projects eligible for customs duty concessions

In April 2006, the MPP was amended to encourage power development in the North-Eastern and Jammu & Kashmir (J&K)

Existing policy Conditions to be fulfilled by the developers for grant of ‘mega project status’:a) Inter-state thermal power plant of capacity of ‘700 MW or more’ located in the states

of J&K, and 8 North-Eastern States

b) An inter-state thermal power plant of capacity of ‘1000 MW or more’ located in other States


Mega power policy (Contd.)

Existing policy (Contd.)a) Inter-state hydel power plant of a capacity of ‘350 MW or more’ located in North-

Eastern and J&K

b) An inter-state hydel power plant of capacity of ‘500 MW or more’ located in the states other than those specified in clause (a) above

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Part IV:Tax holiday / Fiscal incentives

Tax holiday and other fiscal incentives for power generation


Tax holiday

ProvisionsSection 80-IA of Act, an undertaking engaged in the business of generation or generation and distribution of power is eligible for tax holiday

PeriodThe tax holiday is available for a period of 10 consecutive assessment years within a block of 15 years beginning from the year in which the undertaking commences generation of power

ConditionsAdditional conditions

The eligible business should qualify as an “undertaking”. The term “undertaking” is not defined in the Act and therefore, the same is to be understood on the basis of its ordinary / dictionary meaning and in the light of the principles laid down by various judicial authorities

It should begin to generate power on or before March 31, 2010*

* This time limit was originally fixed as March 31, 2003. It was revised by subsequent amendments, first to 2006 and thereafter to 2010.


Tax holiday (Contd.)

Conditions (Contd.)It should not be formed by splitting up / reconstruction of a business already in existence. “Splitting up or reconstruction of a business already in existence” is not defined in the Act. However, the meaning of the said phrase, as culled out from various judicial decisions, is that the company should primarily demonstrate that the unit has a distinct identity from the existing business and the new unit is in a position to function as an independent business activity

It should not be formed by transfer to a new business of plant or machinery previously used for any other purpose. However, the following exclusions are provided for this purpose:

Plant and machinery imported into India, which was earlier used outside India by any other person if such assets are not used at any time in India. Further, no depreciation should have been claimed in respect of these assets in India

Where the value of old plant or machinery does not exceed 20 percent of the total value of the plant or machinery in the new business, this condition shall be deemed to be satisfied


Restriction on transfer of business Finance Act, 2007 restricts the eligibility of an undertaking to claim tax holiday if such undertaking is transferred to another company under a scheme of de-merger or merger. Therefore, going forward, business re-organization via merger / demerger of a tax holiday business would result in denial of the tax holiday for the unexpired period. The amendment will have effect in relation to all mergers / de-mergers after March 31, 2007

Whether claim for depreciation is optional?The taxpayer does not have the option to defer depreciation in any year and depreciation has to be claimed each year

Tax holiday (Contd.)


Customs duty exemption

Customs duty exemption Under the Project Import scheme, complete exemption from customs duty is available on import of goods for setting up of Mega Power Project

For availing the abovementioned benefit the following conditions to be fulfilled:

Certification to be made by an officer not below the rank of a Joint Secretary to the Government of India in the Ministry of Power

Certification to state that the power purchasing State has constituted the Regulatory Commission with full powers to fix tariffs

The power purchasing State undertakes, in principle, to privatize distribution in all cities, in that State, each of which has a population of more than one million, within a period to be fixed by the Ministry of Power

The quantity, total value, description and specifications of the imported goods are to be certified by the Chief Executive Officer in charge of setting up the Power Plant


Deemed export benefits and excise duty exemption

Deemed export benefitsUnder the Foreign Trade Policy, deemed export benefits are available to domestic bidders under public and private sector

Excise duty benefits All goods supplied against international competitive bidding (ICB) are exempt from excise duty


Conditions for availing fiscal concessions

Fiscal Concessions / benefits available under the MPP (Contd.)Goods required for setting up mega power project, qualify for the fiscal benefits if:

a) The power purchasing states have constituted electricity regulatory commissionswith full powers to fix tariffs

b) The power purchasing states undertake, in principle, to privatize distribution in all cities, in the state, each of which has a population of more than one million, within a period to be fixed by the Ministry of Power (‘MoP’)

In addition, to ensure that domestic bidders are not adversely affected, price preference of 15 percent would be given for projects under the public sector


Way forward

Exemption from service tax on services provided to and received by mega power plant

Exemption of VAT on supplies

Moderating ECB restrictions

Extending the sunset clause of availing tax holiday benefits beyond 2010

In light of the foregoing, revision of the following is required to give impetus to power sector development

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