It was a mixed bag for the power sector as finance minister Pranab Mukherjee, with a view to encourage power generation and reduce transmission and distribution losses, decided to extend the tax holiday for the power sector by one more year, till March 31, 2012.
The extension of the tax break is part of the government's efforts to scale up the country's power generation capacity to meet growing needs. Unveiling the budget for 2011-12, Mukherjee said the tax holiday for the power sector would be extended till March 31,2012.
The power sector is entitled to tax exemption, under section 80-IA of the Income Tax Act, which ends this fiscal. The tax exemption would benefit projects that are expected to take off in the remaining time of the 11th Five Year Plan (2007-12), including Ultra Mega Power Projects.
Further, the government is planning to provide excise duty exemption for domestic companies that supply capital goods for mega and ultra mega power projects.
Capital goods imported for existing mega or Ultra Mega Power Projects (UMPPs) are given concessional excise duty. These goods are entitled for a concessional basic customs duty of 2.5%, as well as, exempted from Counter Vailing Duty (CVD).
“We appreciate the steps taken to attract investments in power and infrastructure sector," said the managing director, Tata Power, Anil Sardana while referring to measures like introduction of tax-free bonds of Rs 30,000 crores; lowering withholding tax of 5% for notified Infra funds; raising FIIs limit in corporate bonds for investment in infrastructure and extending tax sops on infrastructure bond by a year, to support the growth aspirations.
Sardana said the import duty reduction on coal from 5% to 2.5% will benefit the power industry as a whole. Further, announcements like no excise duty on equipment for UMPPs and raising the Rural Infra Fund from Rs 16,000 crore to Rs 18,000 crore are also welcome steps, he added.
However, Sardana said for the power sector to keep pace with the growing economy and sustain GDP growth at 8.6%, some other measures such as -- extension of tax holiday 80 IA for generation capacities coming up until March 31, 2017, exemption from MAT, Central Sales Tax and Service tax as they impact the growth as well increase tax burden on end customers -- could have been introduced. The marginal increase in MAT from 18 to 18.5% is likely to adversely affect the power industry, he said.
During this Plan period, capacity addition was envisaged at 78,700 MW and was later revised to 62,374 MW. Capacity addition of 32,032 MW was achieved till December 31, 2010.
Projects that start power generation, distribution, transmission or that undertake substantial renovation and modernisation of existing network are eligible for exemption.
Mukherjee noted the exemption creates a disability for the domestic suppliers who are required to pay central excise duty on supplies to mega and such projects. "I propose to correct this anomaly by providing a parallel excise duty exemption," he added.