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Tax sops a boon for power sector

By Capital market
July 07, 2009 14:50 IST
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The power sector, which is in the midst of massive capacity expansions, will benefit from the extension of benefit U/s 80 IA of the Income Tax Act upto 31st March 2011.

Union Budget 2009-10 has been mildly positive for the power sector. The budget has provided for extension of sunset clause for tax holiday under section 80-IA of the Income tax act available for power generating unit as well as transmission and distribution companies upto March 31, 2011.

Budget provisions

  • Extended the terminal date for tax benefits u/s 80 IB (4)(iv) of IT Act for a further period of one year upto March 31, 2011 for undertakings set up for power generation unit, transmission & distribution line or renovation & modernization of existing T&D lines beginning April 1, 2004 & ending March 31, 2010.
  • Extended the terminal date for commencing activity of generation, transmission / distribution of power for eligible for Ten year tax benefit u/s 80 IB (4) (v)  from March 31, 2008 to March 31, 2011 with retrospective effect from April 1, 2008.
  • Excise duty on naphtha reduced to 14%.
  • Minimum Alternate Tax increased to 15% of book profits from 10%. And the period allowed carry-forward the tax credit under MAT to be extended from seven year to ten years.
  • Abolished Fringe Benefit Tax

Industry expectations not met

  • Exemption of import duty on power equipment that is currently available only for Mega Power Projects of above 1000 MW in size only should be extended for plants that are 500-1000 MW also. IEEMA wants that to the soaps to be extended to decentralized generation projects in the range of 1 MW plus also.
  • Prevailing duty & tax structure in the country prevents private merchant power plants from getting a credit or offset of duty & tax paid on input costs, both capital side as also on fuel and operational expenses. This imposes a heavy financial burden on the price of electricity generated at such merchant power plants that use fuels such as liquid fuels (furnace oil, residual fuel oils etc) or natural gas. Hence the government should evolve a mechanism whereby such duty & tax loading be eliminated on generated electricity.
  • Interest payable by Indian power/ infra companies should be exempted from Indian income tax U/s 10 (15) or withholding liability.
  • Refinancing of existing rupee loans through ECB should be allowed for infrastructure sector
  • Introduce single window clearance for various approvals required by the power projects.
  • Amend Atomic Energy Act to enable private sector participation
  • Promote Big RE Projects and incentive renewable energy generation.

Stocks to watch

NTPC, Tata Power, CSES, GIPCL and Torrent Power.


Given the fact of extension of benefits upto March 31, 2011 that is the peak period where significantly large planned generation capacity is scheduled to commence operation is a welcome measure for the power sector. However the budget has not provided for other core demands of the industry such as refinancing of existing rupee loans ECB should be allowed for infrastructure sector as well as withholding tax exemption etc.

Though increase in MAT is to affect the cash flow of the companies especially the infra developers, on overall basis the Union Budget 2009-10 is a positive one for the power sector.

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