Ministry objects to proposed 16% duty on power plants in SEZs

Ministry objects to proposed 16% duty on power plants in SEZs

New Delhi: The commerce ministry has objected to a budgetary proposal to impose 16% customs duty on power plants inside the special economic zones (SEZs) that supply to domestic tariff areas—which lie outside the tax-free enclaves—as well as the non-processing areas of the SEZs.

SEZs are permitted to carry out commercial activities within well-demarcated processing areas, while non-processing areas are meant for setting up schools, hospitals, hotels and other social infrastructure.

The Budget has proposed to introduce the duty with retrospective effect from 26 June.

“The notification in this regard is not clear. We have written to the revenue department to clarify whether the proposal to impose customs duty is only on a power unit set up in the processing area or the power unit set up in the non-processing area as an infrastructure facility," a senior commerce ministry official said on condition of anonymity.

The ministry has also told the revenue department that power plants set up as infrastructure should not be asked to pay the duty as they don’t enjoy the tax benefits availed by units set up in the processing area.

Power plants in non-processing areas of SEZs are only eligible for initial setting up fiscal benefits, and do not enjoy benefits for operation and maintenance.

But a unit set up inside an SEZ to generate power as a product, or a unit that has a captive power plant located in the processing area, is entitled to all fiscal benefits—including those for initial setting up, maintenance and import of raw materials for generation of power.

The commerce ministry has also asked the revenue department to distinguish between power units based on input and the size of the plant.

“A 100MW and a 1,000MW power unit cannot be asked to pay customs duty at the same rate. Also, whether the power unit uses conventional resources (coal, gas) or renewable energy resources (solar power) should also be taken into account," the official said.

Tapan Sangal, senior manager at the consultancy PricewaterhouseCoopers, said the new levy will discourage the setting up of power plants within SEZs. “The government should incentivize power generation within SEZs when there is a huge shortage of power."

Currently, Reliance Industries Ltd, Adani Group and Essar Group are building power plants at their respective SEZs in Jamnagar, Mundra and Hazira in Gujarat. None of them is complete.

Wardha Power Co. Pvt. Ltd, which had received the approval to set up a power sector SEZ at Warora in Maharashtra, has now requested the commerce ministry to denotify the SEZ, citing lack of demand for power due to the global economic slowdown. The proposal will be taken up on 9 April by the board of approval under the commerce ministry.

Hitendra Mehta, head of law firm Vaish Associates, and an expert on SEZ and taxation matters, said use of renewable energy resources for power generation should be incentivized, particularly as the commerce ministry was pushing for environment-friendly SEZs. “Such power units should not be asked to pay customs duty on sale of electricity, also because the cost of equipment in this case is very high."

The commerce ministry has approved 574 SEZs, but only 105 have become operational.

Total investment in SEZs stands at Rs1.15 trillion; 227,669 people were employed by 2,761 units within SEZs by the end of 2009.

Exports from SEZs between April and December stood at Rs1.52 trillion, an increase of 127% from a year ago.