New Delhi: The power sector may get a boost in the forthcoming budget as withholding tax on overseas investment in the sector may be removed to attract investments.
Also See | The year of living dangerously
“Our consultations with the finance ministry are over. Removal of withholding tax will accelerate overseas lending to the Indian power sector,” a senior official in the power ministry said on condition of anonymity. “We have asked for the removal of the tax and to our understanding this request may be accommodated.”
“We are given to understand that the budget may grant our wish,” another power ministry official said separately.
The finance ministry’s position could not be confirmed as it is under quarantine during the last phase of preparations for the Union budget, scheduled to be announced on 28 February.
Withholding tax is charged on the repatriation of income from equity or debt. Typically, an overseas investor can approach the tax authorities of its home jurisdiction to offset the tax deducted by Indian authorities.
“Exemption is always better than credit,” said Sujit Ghosh, partner at BMR Advisors Pvt. Ltd, explaining why foreign lenders want to be exempt from withholding tax. “If a lender has losses, exemption serves no purpose.”
The power ministry’s representations on exemption of withholding tax are driven by the funding needs of the sector.
The ability of the domestic financial system to fund long-gestation power projects is limited by sectoral caps set by the central bank.
According to Reserve Bank of India data, banks had an exposure of Rs2.43 trillion to power projects on 19 November, among the highest in relation to other sectors.
Generally, a power project has Rs70 of debt for every Rs100 invested, Ghosh said.
When Indian borrowers try to raise money overseas, they find their costs are higher on account of withholding tax, said an investment banker who did not want to be named as he is not authorized to speak to the media.
Overseas lenders find compliance costs going up if they have to approach their own tax authorities for credit when Indian tax authorities deduct withholding tax, the banker said. The effective withholding tax is around 22%, the banker added.
In such a situation, the lenders want Indian borrowers to add the extent of withholding tax to the interest rate, thereby increasing the cost of borrowing, the banker said.
India’s power sector, which is already struggling with funding shortfalls, will need $400 billion (around Rs18 trillion today) of investment during the 12th Plan (2012-17). The government is worried about the funding scarcity facing the power sector, which threatens to worsen an energy deficit that’s seen as a key bottleneck in efforts to sustain and boost economic growth.
India currently has a power generation capacity of 169,748MW. The 11th Plan had set a target of adding 78,577MW of generation capacity, requiring, at current estimates, some Rs10.31 trillion of investment. The power ministry estimates a Rs4.51 trillion funding shortfall. The target has since been revised to 62,374MW.