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Wednesday, March 2, 2011

More power to equipment makers

The finance minister has taken a step towards providing a level-playing field for domestic and foreign power equipment manufacturers 
As of now power projects above the size of 1,000 megawatts also called mega power projects, which import their equipment like boilers, turbines and generators, enjoy a concessional basic customs duty of 2.5 per cent and full exemption from counterveiling duty (CVD)
“This creates a disability for the domestic suppliers who are required to pay central excise duty on supplies to such projects. I propose to correct this anomaly by providing a parallel excise duty exemption," said Pranab Mukherjee, the Finance Minister, in his Budget speech. 
Domestic power equipment makers have welcomed this move. "Earlier, imported equipment had a customs duty exemption and since excise duty is linked to that, we had to pay 10 per cent excise duty. Now that has been removed," explained a top official from a capital goods company. 
Excise duty exemption has been granted to all machinery, equipment, their components and raw material used for the manufacture such machinery, equipment, supplied to ultra mega power projects and mega power projects or for the expansion of existing mega power projects. 
"Also, the condition that the goods to which such an exemption has been granted should be exempt from customs duty has also been removed. This makes supplies from domestic manufacturers competitive to foreign imports," said Satish Aggarwal, Partner-Infrastructure Practice, Ernst & Young. 
Domestic power equipment manufacturers who have been battling competition from Chinese manufacturers, have earlier complained that this tax has an indirect impact on their equipment prices. "This move will ensure that domestic equipment manufacturers are not at a disadvantage," said Pradeep Lenka, president-power, 

GVK Infra
But experts also say that the effect of this minor duty exemption, is negligible as on an average, Chinese equipment costs 35-40 per cent less than Indian power equipment by capital goods companies like BHEL and L&T Mitsubishi. 

"Whatever has come in, is welcome but it is not too comforting or sufficient to encourage domestic manufacturing of power equipment. We had expected more sops to promote local equipment across the sector like in thermal, renewable and even nuclear, in a manner what countries like China provide to their manufacturers," said Kameshwara Rao, head-power practice, PriceWaterhouse Coopers. 
The Finance Minister however ignored the long standing demand of domestic equipment makers, to increase import duties on foreign equipment. The industry has made a representation to the government asking them to hike customs duty for imported equipment by five per cent, and CVD by ten per cent. 
"These recommendations which have been made by the industry, are still pending with the government. The announcement today could be a step in that direction but the main issue still remains," said a top official from a capital goods company. However, some experts feel that any such move would have been regressive, as the country has a huge demand supply gap for power and needs faster execution of power projects. "The whole idea is that power sectors developers will not struggle for want of equipment," said Debashish Mishra, Senior Director, Deloitte Touche Tomatsu.

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