Power firms plan 5-7pc tariff hike if proposal to withdraw tax benefits and impose duty on import of equipment for power plants is accepted

Power tariffs are likely to see a 5-7% increase in the next few months if the proposal to withdraw tax benefits and impose duty on import of equipment for power plants is accepted.The cost of production for power companies has risen with the government doubling the price of gas under the administered price mechanism in May.

To make matters worse, a proposal to withdraw the 10-year tax holiday for power plants and impose 19% import duty on power equipment for units with over 1000mw capacity (mega power plants) is under consideration.While the move to dissuade import of power equipment is being taken to promote the interests of domestic power equipment manufacturers, it is likely to delay the commissioning of power projects.

The government has set an ambitious target of adding 78,700 mw capacity during the 11th plan (2007-2012). However, it has managed to add just about 22,000mw so far.Private power players, under the aegis of Association of Power Producers, have written to the prime minister that levying import duty on power equipment will force them to increase the power tariffs.

“While we welcome the initiatives the government is considering to encourage domestic equipment manufacturing, we believe imposing of customs duty has serious implications on the cost structures and tariffs and can seriously impact the capacity addition programme being planned by the private sector,” the association wrote.A committee of secretaries (CoS) had on July 12 passed the proposal of levying import duty on the imported equipment for power plants.

While a report prepared by Planning Commission member Arun Maira had proposed only 14% import duty on imported equipment, the CoS headed by cabinet secretary KM Chandrashekhar increased the duty by 19% in its final decision.If the cabinet approves the decision of CoS then the imported power equipment will attract a 5% customs duty, 10% countervailing duty and 4% special additional duty.

Domestic power companies have placed orders for overseas equipment to generate 26,000mw annually because of the slow delivery cycle of local manufacturers to meet growing demand.Rupesh Sankhe, an analyst with of Angel Broking said imported power plants from China are relatively cheaper.“While the per-megawatt cost of completion of a thermal power project using Chinese equipment is around Rs3.5-4 crore, it works out to Rs4.5-5 crore for projects using equipment from elsewhere,” Sankhe wrote.“An increase in import duty will force the developers to increase their power tariffs by 5-7%,” Sankhe added.

Arun Srivastava, executive director, infrastructure & government advisory, Ernst and Young, with power producers entering into long-term power purchasing agreements, mid way policy changes by the government hurt.“The foreign companies have a shorter delivery cycle. If the import of foreign equipment is discouraged, it will increase the time required to set up power plant by around 2-8 months,” Srivastava added.