New Delhi: The power ministry wants finance minister Pranab Mukherjee to extend the tax holiday on power projects when he presents the Budget to Parliament on 26 February.
The tax break under section 80-IA of the Income-tax Act ends on 31 March, 2011, making any power project that starts operating after that date ineligible for the benefit. The law allows a developer to claim tax exemption of up to 10 years within the first 15 years of a project’s commissioning. The original deadline was 31 March 2010, which was extended to March 2011 through the Finance Act 2009.
With significant capacity augmentation planned for the 12th Plan (2012-17) that won’t be commissioned before the deadline, the power ministry believes ambiguity on the extension is affecting funding commitments. A power project requires a minimum period of around two years to achieve financial closure.
“We have asked for the concessions which are there to continue,” said a top power ministry official, who did not want to be identified.
“The extension of tax holiday under section 80-IA of the Income-tax Act for power projects is expected in the Budget,” said another power ministry official, who also did not want to be identified.
The deadline extension could not be independently verified from the finance ministry.
India has a power generation capacity of 153,000MW and plans to add 78,577MW by 2012, requiring some Rs10.31 trillion. According to the power ministry, the government expects to face a Rs4.51 trillion funding shortfall. Of the 11th Plan capacity targets, the government now expects only around 62,000MW to be commissioned, with the balance now expected in the 12th Plan. In addition, the government is planning a capacity addition target of around 100,000MW in the 12th Plan.
“Financing of independent power projects is a challenge in itself given the limited number of developers of repute. Uncertainties in the section 80-IA provision will make a huge difference to the viability of the project,” said Shubhranshu Patnaik, an executive director at audit and consulting firm PricewaterhouseCoopers. “Any delay in extension will definitely impact financing.”
Thermal power projects require an investment of around Rs5 crore per MW. For hydroelectric projects, the investment per MW is higher on account of issues relating to preparation of detailed project reports, relocation and resettlement, and environmental issues.
“The government would like to maintain status quo on the fiscal regime on power plants until such time till the new direct tax code comes into play,” said Gokul Chaudhri, partner at audit and consulting firm BMR Advisors. “This impending change of law creates an element of uncertainty on project economics.”
The direct tax code, which has proposed a dramatic makeover of India’s 49-year-old tax law, will replace the Income-tax Act, 1961, and has suggested significant cuts in tax rates for individuals and companies, pruned exemptions, choked loopholes for foreign companies, and radically changed definitions. The Congress party-led United Progressive Alliance government has sought public opinion on the code, without saying when it will be introduced.