New Delhi: The government may extend the deadline for a tax holiday for companies setting up ultra mega power projects (UMPPs) by seven years in an effort to sustain the interest of these companies in such projects, many of which are yet to be awarded and because the few that have been awarded will not start operations before the original deadline.
The change may be made in the coming Union Budget. The original deadline for the tax holiday scheme was 2010, which would have meant that any UMPP that starts operating before 2010 would have been eligible. The new deadline will be 2017.
The extension will also apply to other power projects but companies setting up UMPPs will likely be the biggest beneficiaries.
“The rationale for extending the exemption...is very simple as very few units of these 4,000MW UMPPs are expected to be commissioned by 2012. It is, therefore, being discussed to extend it (the tax holiday) till the end of the 12th Plan (2017) when most of these projects get commissioned,” said a senior government official involved in the making of the Union Budget who did not wish to be identified.
Experts say the extension will encourage more private companies to bid for UMPPs. “If the tax exemption is extended till 2017, the bids for power projects will get more competitive,” said Kuljit Singh, partner at audit and consulting firm Ernst and Young.
The government plans to set up 12 UMPPs in an effort to cater to rising demand for power in the world’s second fastest growing major economy. UMPPs are expected to come up in Sasan (Madhya Pradesh), Mundra (Gujarat), Tilaiya (Jharkhand), Krishnapattnam (Andhra Pradesh), Cuddalore and Marakkanam (Tamil Nadu), Jharsuguda (Orissa), Girye (Maharashtra), Tadri (Karnataka), and Akaltara (Chhattisgarh).
However, the projects have had their fair share of problems. While the projects at Mundra, Sasan and Krishnapattnam have already been awarded, the Centre is expected to abandon plans to set up UMPPs at Girye, Tadri, and Akaltara. Each UMPP will cost around Rs16,000 crore to set up. The projects are being awarded through competitive bidding, where each company mentions how much it will charge for a unit of power. The company that offers to charge the least for the power is awarded the project.
In the run-up to last year’s budget, the power ministry wanted the finance ministry to extend the deadline to 2015. That proposal wasn’t accepted, but this year, the Planning Commission, India’s apex planning body, has thrown its weight behind the effort to extend the deadline even as it envisages the addition of 111,500MW of generating capacity at a cost of Rs10.6 trillion by 2012.
India has a power generation capacity of 135,000MW.
The tax holiday, which will fall under section 80-IA of the Income-tax Act “may also be extended to operation and maintenance utilities,” the government official said.
Other likely benefits related to the power sector in the coming Budget include tax exemptions to companies involved in improving energy efficiency and awarding the so-called pass-through status to venture capital funds investing in the sector.
The pass-through status ensures that profits earned by these funds when they exit fr-om unlisted firms are not taxed while individual investors are taxed when they receive distribution from the fund.
The Budget may also halve excise duty on the power sector to 8%, give partial relief on excise duty for energy-efficient appliances such as refrigerators, air conditioners, motors and pumps and fully exempt power distribution franchises from service tax.