New Delhi: To bail out India’s crisis-hit power sector, finance minister Pranab Mukherjee on Friday proposed scrapping the import duties on coal and liquefied natural gas, increasing the limit on overseas borrowing and reducing withholding tax on foreign investments.
Scrapping import levies on coal would help meet the growing demand for the fuel in a country where 70% of electricity is generated from it. In addition, a countervailing duty of 1% on thermal coal till March 2014 was also announced in the Union budget, along with customs duty exemption for coal mining projects.
While such exemptions will increase the demand for imported coal, they will also help state-owned Coal India Ltd’s mining plans. The size of the market for imported coal for power generation in India is around 80 million tonnes (mt) a year. The demand-supply gap is expected to touch 450 mt by 2017, which is largely expected to be met through imported coal. It takes around 5,000 tonnes of coal to generate 1 megawatt of power.
Only 320 mt of coal is expected to be supplied to the power sector by Coal India against the committed 347 mt in the fiscal year ending 31 March. The state-owned firm mined only 431 mt in 2010-11 against a target of 461.5 mt because of stalled projects. Its overall target in the current fiscal is 452 mt.
Similarly, the withdrawal of import duty on natural gas, used as fuel in power plants, will offset sharp spikes in the price of imported natural gas and help in setting up gas-based capacity in the country.
According to the Economic Survey presented in Parliament on Thursday, India’s natural gas production dipped 9% to 36.19 billion cubic metres (bcm) during April-December from 39.68 bcm in the year-ago period, due to falling gas production from Reliance Industries Ltd’s D6 field in the Krishna-Godavari basin. This resulted in power generation from gas-based plants contracting by 4%.
In addition, the budget also proposed extending a tax holiday under section 80-IA of the Income-Tax Act, which ends on 31 March 2012, by another year. The law allows a developer to claim tax exemption of up to 10 years within the first 15 years of a project’s operations. An additional depreciation of 20 % in the initial year, which has been extended to newly acquired projects, will help consolidation in the sector.
These announcements were likely to be made in the budget, Mint reported on 1 March.
To help the fund-starved sector, Mukherjee proposed to raise Rs 10,000 crore through state-owned companies such as Power Finance Corp. Ltd and Rural Electrification Corp. Ltd through tax-free infrastructure bonds in FY13.
The power ministry estimates that an investment of $400 billion will be required during the five years ending March 2017.
Reducing the withholding tax to 5% from 20% will boost overseas investment in the sector. This tax is charged on the repatriation of income from equity or debt.
These measures, along with the enhancement of external commercial borrowings to part-finance rupee debt of existing power projects, resulted in a spike in the share prices of power companies such as Reliance Power Ltd.
In addition, the budget also announced incentives to promote the use of energy-efficient appliances and light-emitting diodes (LEDs).
“I propose to fully exempt a coating chemical used for compact fluorescent lamps from basic customs duty. Excise duty on LED lamps is also being reduced to 6%,” Mukherjee proposed.