Govt likely to give breather to power sector by extending tax holiday by another year - All 11th Plan power plants to be benefited

The government is likely to give a breather to the power sector by extending the tax holiday for the sector by another year. The move will benefit power projects, including ultra mega ones (UMPPs) and transmission projects, that are slated to be awarded in the remaining period of the 11th Plan (2007-12).
This could be part of the Budget announcements on February 28.

The power sector currently gets tax break under Section 80-IA of the Income Tax Act. The sop ends on March 31, 2011 making projects which are awarded after the cut-off date ineligible for the benefit. Under the provisions of the section, power projects get deduction of up to 100% profit for any ten consecutive years out of the first fifteen years of commissioning of a project. Earlier, the benefit was to end on March 30, 2010 but government extended it by an year in the last Budget, enabling.projects awarded since then to be eligible for the benefit.

“Power sector could get an additional year to enjoy the benefits under Section 80 IA, which will also ensure that all projects awarded in the 11th Plan get similar tax breaks,” said a government official privy to the development.

The biggest beneficiary of the extension will be state-owned NTPC, while projects of companies such as Sterlite, Jindal Power, Lanco, GMR and other state utilities could also avail of the tax sops. In addition, few private sector transmission projects could also benefit from extension of Section 80 IA benefits.

“ Direct Tax Code is slated to become operational from fiscal 2012-13, which will discontinue all profit-linked tax incentives for infrastructure sector projects,” the official added.

The draft DTC Bill seeks to discontinue profit-based tax incentives and provides for an expenditure-based incentive (capital expenditure) scheme in relation to specific industries such as infrastructure (roads, ports and airports), power sector and SEZ developers.

Though the companies enjoying tax incentives under any existing scheme would continue to get them for the unexpired period, projects awarded (and where developers have made some investment) after the cut-off date will be governed by provisions in the code. The proposed changes will help power projects in excess of 20,000 mw that is likely to be awarded in the 2011-12 fiscal. It will also benefit UMPPs, as the government expects that at least three such projects may be bid out in next fiscal.

“We have asked for tax holiday similar to the one that is available under 80 IA to be provided in the Direct Tax Code Bill, at least up to March 31, 2017 so that continuity is maintained and uncertainty is avoided,” said an official in the power ministry. The ministry in its pre-budget submission.before the finance ministry has also sought extension of this Section up to 2017 to give benefit to ultra mega power projects and transmission projects planned for Eleventh and Twelfth five year plan periods. “ The government should have a uniform policy of incentives till Direct Tax Code is implemented. This will remove uncertainties and help projects to get financial closure,' said an industry expert. A thermal power projects requires an investment of close to Rs 5 crore for 1 mw of power. With country planning to add over 62,000 mw in 11th Plan and another 80,000-100,000 mw in the 12th Plan, tax holiday could act as catalyst to attract investment. India currently has a power generation capacity of 1,70,000 mw.

Even for the 11th Plan projects, the government has calculated huge shortage of funds to the tune of over Rs 4 lakh crore. This is expected to increase substantially.in the next plan period. In view of the situation, already several measures have been taken to augment funds for the sector and more are being explored to see that necessary investment comes in the sector.

Development of power sector is crucial for growth needs of the country as a deficit situation inhibits industrial activity. Already the country is facing over 12% peaking shortage that is considered unsustainable for a country that aspires to take up its GDP growth rate to double digit mark