New norms soon to help power units in special economic zones

Power companies looking to set up plants in Special Economic Zones (SEZ) may soon be exempted from the positive net foreign exchange (NFE) obligation applicable to regular units in such enclaves.

The proposed move is expected to help power companies such as Torrent Energy, Welspun Energy and AES that have plans to operate in SEZs.

Most power firms have not been actively considering setting up plants in SEZs due to feasibility concerns arising from the positive NFE norm (foreign exchange from exports should exceed imports).

Currently, the Revenue Department treats a power plant in the processing area just as any other export unit and not as an infrastructure facility/developer/co-developer. That means its output is considered as a ‘good' that would attract the positive NFE obligation.

The processing area in an SEZ houses export units, while the non-processing area has social infrastructure including residences, hospitals and schools.

Power companies say that unlike manufacturing/IT/ITES units, it is not possible for them to achieve a positive NFE. Though the supply of power to units within the SEZ is treated as exports and counted towards calculation of positive NFE, achieving economies of scale is difficult by just supplying to SEZ units.

The only option is to sell the surplus electricity generated to units in the domestic tariff area (area outside the SEZs where all taxes and duties apply) by paying the applicable levies.

“Power companies have no problem in paying levies. Their problem is only in the NFE condition. Even if all their supplies to the SEZ units are deemed as exports, it will still be difficult to meet the positive NFE norm due to the high capex,” a consultant to a power company said.

The Government is now in the process of framing fresh guidelines for power plants in SEZs.

Official sources told Business Line that the guidelines would allow power firms – that want to operate from the processing area of SEZs – to apply as developer/co-developer.

Being a co-developer/developer would mean that the positive NFE obligation will not be applicable to the power firms. It will also give the power companies the status of an infrastructure company, thus entitling them to fiscal benefits.

Acting on representations from the sector, the Commerce Ministry has obtained the opinion of the Law Ministry, which is understood to have said that power firms in processing area can also be allowed to apply as developer/co-developer.

Commerce Ministry officials point out that since the country is power-starved, power firms should be encouraged to set up operations anywhere – be it in processing or non-processing area in SEZs.

The Commerce Ministry will now hold a new round of talks with the Revenue Department to finalise the guidelines.

Mr Tapan Sangal, Partner at consultancy firm BDO, said, “Such a policy change will not only boost the power sector, but also the SEZ segment which is currently facing challenges such as imposition of Minimum Alternate Tax and the proposal in the Direct Taxes Code to do away with profit-linked incentives.”