Business Today

Firing up with tax sops

Mega power projects may soon get tax breaks.

By Balaji Chandramouli        Print Edition: Sept 23, 2007

Large new power plants may well end up producing power at lower prices if the Power Ministry has its way. The ministry is working on a proposal to relax the conditions for availing tax concessions for power projects of 1,000 mw and above. According to officials, a note for Cabinet approval is underway. Currently, under the Mega Power policy, which is close to 12 years old, power from the project needs to be sold to more than one state. Further, the consuming states need to privatise the distribution business in large cities. The government now plans to do away with both these conditions.

The sops under the existing mega policy are significant: waiver of import duty on equipment as well as an income tax holiday for any block of 10 years in the first 15 years of operations. That could shave off as much as 8 per cent of the tariff of a domestic coal-based power plant of around Rs 1.50 per unit. "If these relaxations are made, it will become easier for private power projects to avail the tax concessions since the existing norms are very stiff," says CMD of Power Trading Corporation, T.N. Thakur.

The norms were framed at a time when the states were not willing to view electricity as a commercial commodity-free power to farm sector and political patronage for power theft were rampant. As a result, for every rupee of power sold, no more than 50 paise was recovered. Today, while the pace of reforms is still slow, it is perceived to be irreversible, argue industry watchers. Given that the economy is growing at a robust pace of close to 10 per cent per annum, power demand is rising like never before. That makes it easy for states to individually absorb 1,000 mw.

As for the pre-condition of privatisation of power supply in purchasing states, the Central government has come around to the view that power sector reforms can be pursued through other measures as well-which is nothing but a tacit resignation to the fact that no state government is willing to undertake it. In fact, the only case in the last few years under the mega policy-the Lanco Group-promoted 1,015-mw Nagarjuna power project in Mangalore-early this year obtained a 'weak' guarantee from the purchasing states of Karnataka and Punjab on privatisation of distribution. However, it does not contractually bind the states-if the states do not undertake it, Lanco still will benefit from tariff concessions flowing from the tax sops. Perhaps, the proposed government policy will only eliminate the need for such 'paper' certificates.

The proposal is likely to face resistance from the Finance Ministry, which will forego revenues as the proposed liberal policy will find many takers. Moreover, the policy, which was initiated as a reform driver to improve the state power sector, will cease to be a reform instrument. Against this backdrop, the Finance Ministry finances and rewards states that undertake reforms through its Accelerated Power Development and Reforms Programme (APDRP). Over the last few years, it has spent as much as Rs 10,000 crore on this count.

Lowering the state's power bill by providing tax sops is not entirely a noble endeavour. With a good part of power still lost to theft, the Power Ministry will find it tough getting past the Finance Ministry. Unless, it can convincingly prove that the future will be vastly better.

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