The government, which has extended help to the crisis-ridden power sector by removing duty on imported fuel and opening access to cheap overseas funds, is likely to whittle down the benefit with an impost on imported equipment for mega power projects. A duty of 20.94% will be imposed on equipment imports for mega power projects, bringing them on par with other power projects.
The move will take away the incentive available to a large number of power generators to source cheap equipment from overseas markets, particularly China.
As per the note finalised by the power ministry for Cabinet Committee on Economic Affairs’ approval, imported power equipment for mega power projects will attract 5% basic customs duty, 12% countervailing duty (after the excise hike to 12%) and 4% special additional duty. Cumulatively, this works out to 20.94%. Of this, the CVD is equivalent to the excise duty for domestic producers (which Bhel and L&T will have to pay) and SAD is in lieu of state VAT. The basic customs duty alone will act as an import tariff.
“We were asked by top functionaries in the government to hold back Cabinet approval for this important piece of tax proposal till the Union Budget. Now, it could be taken up immediately,” said an official.
The changes will dilute the government's mega power policy, which offers benefits to thermal power projects of 1,000 MW and above and hydro projects of 500 MW and above by way of a tax holiday for 10 years and customs waiver on equipment imports. At present, a 5% duty is levied on equipment imported for power projects with capacities less than 1,000MW.
“The mega power benefit has been of immensely useful to the power sector in sourcing world-class, cost-effective equipment from abroad along with international financing. The Budget has not taken up proposal on the new duty and we hope that existing benefits continue,” Association of Power Producers' director general Ashok Khurana said.
“The duty on power equipment will not only add to our cost of generation, but will also rob us of timely and fast deliveries ensured by overseas suppliers,” said a private sector power generator who has placed orders for Chinese equipment for few projects.
A power ministry official said large equipment capacity was being built in country; so with competition, even price of domestically produced equipment would fall negating the disincentive to generators who were importing equipment now. Chinese equipment is said to be 25-40% cheaper than domestic variants.
The government has proposed the levy to counter the surge in imported equipment, particularly from China. Once implemented, the duty is expected to provide a level playing field to domestic equipment manufacturers like Bhel and L&T, who together currently support 18,000 MW of capacity. It is expected that capacity would go up to 35,000 MW over next few years with new manufactures like BGR Energy, JSW and Alstom-Bharat Forge opening their facilities. Bhel is also expected to ramp up its capacity to 20,000 MW by the end of year.
Around 42,000 MW of capacity has already been added in the 11th Plan and 76,000 MW is under construction for benefit in the 12th Plan. Around 59,580 MW (about 48%) of orders out of the total 122,965 MW have been placed with Bhel. Share of orders placed on Chinese manufacturers have been 48,090 MW (about 39%) and 7,960 MW (about 6.5%) on other foreign manufacturers. Besides Bhel, other domestic manufacturers have only 7,335 MW (about 5.6%) share out of 76150 MW of orders placed so far.
The Budget has doled out benefits for the sector by way of withdrawing import duty on coal and R-LNG, allowing ECB to part re-finance the rupee debt on power plants, tax free bond for power sector has been increased from Rs 5,000 crore to Rs 10,000 crore, withholding tax on ECB has been reduced from 20% to 5% for three years, the sunset date for 80IA benefit of the Income Tax Act has been extended by one year, i.e. till 2013.
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