'POWER' for Powerless – Can our FM empower?

By Anoop KG

IF you hate the way your TV conks off in the middle of your favorite programme or detest the way you have to bear stifling heat of summer without an AC or a fan, don’t worry – you’re not alone. More than three-fourths of the Indian population shares your angst against the acute power starvation the country is being put through.

India has seen unprecedented growth in her consumption of power during the last decade. Power shortage is the oft-repeated but barely heard story of every village, town or metro. Currently, many villages suffer 12-15 hours of blackouts every day. Even the suburbs of the financial capital are subjected to hours of load shedding. Mind you, this situation is nothing new. The fact of the matter is that the country needs to generate thousands of mega watts of power to satisfy the demands of our growing cities. 

So what can we do to bridge the gap?  Generate more power, what else?

Fortunately, the cards are stacked in our favour – at the moment. The world economy is facing its toughest recession yet. So, the demand for capital equipment used in the generation of power is quite low making such equipment very affordable. What better time could there be for a power hungry country like India to shop around the world for capital equipment used in generation of power?

The natural question that arises is, if power generation equipment has become so cheap, why do we not buy them and make life easier for millions of Indians?

Truth is, even if we were to buy the equipment, the power crisis would still continue. Here’s why.

In India, power is a matter of great political concern.  The generation and distribution of power is still the monopoly of state controlled undertakings in many states. Politicians wield power distribution like some kind of weapon that they use at will during elections.  So, while the country is starving for power, we have leaders bequeathing free and subsidized power on various sections of the population. But, someone has to pay for the free lunch. The State Electricity Boards cough up the money, which means they have little money to augment our power supply even in a market that is selling dirt cheap.

In practical terms, it may not be possible to fill the coffers of State Electricity boards overnight just as it is hopeless to expect a realistic power distribution policy in the near future. So, a more feasible solution is to partner with the private sector to augment the capacity for power generation.  However, private companies would agree to such a partnership only if power can be produced and sold at a reasonable cost and they can make some profit from the exercise.

So, let us take a look at the cost factor for private companies.

As it stands today, the capital cost of setting up a power plant is the single biggest cost in the generation of power.  Even though the cost of capital equipments has come down, procurement  of equipments and construction of power plants attract a host of duties – Customs duty, Excise duty, Vat and Service tax, to name a few. So, any company that procures equipment finds itself paying a huge amount on account of these duties.

In the past, an attempt was made to woo private players to power generation by introducing various tax incentive schemes. The Central Government has announced an income tax holiday for new power units that begin generating power before 31st March 2010. But what happens to power plants that are set up after March 2010 or the new power plants which do not manage to generate power before 31st March 2010? If these plants are to be slapped with hefty taxes, no company would be interested in setting up power plants post 2010.

The government should be looking at restoring/extending the benefits of exemption for a few years more till India attains adequate capability to generate the power it needs. We can ill afford to do anything that increases the cost of generation as on date. In fact, the Honorable FM should look at more incentives to revolutionize power generation in every state. To set aside the allaying fears, the Budget should consider extending the sunset clause by a clear five years and kindle the dwindling interest of new power plants.

The clouds are not clear when it comes to indirect tax either. The Import of equipments used in power generation is exempted from customs duty only if the project qualifies as a mega/ultra-mega power project. This is subject to various conditions. One of the conditions is that a certificate should be issued to the effect that the state in which the power plant is located has agreed to privatize power generation in towns having a population of more than one million. As discussed above, since power is a politically sensitive subject in many states, governments are not willing to privatize it. Hence, the beneficial notification cannot be put to work in a straightforward manner. A few states have corporatized and hived off power distribution into state undertakings. Babus in the Ministry of Power have unleashed their creative imagination and come out with an interpretation that hiving off into a state undertaking is the first step towards privatization, hence such certificates can be given. In this way, a few units were able to obtain the benefit of such exemption notification. But, in a majority of states, the state governments are unwilling to talk about privatization at all. No private player would touch these states with a barge pole as they would not get any indirect tax exemption for setting up power plants here.

The South Block should appreciate the political compulsions of these states and come out with an amendment that gives impetus to power generation all over the country. Given the current political scenario, there really is no reason why they can’t pull this off.

What about other costs? We know that not all capital equipments are imported. The local procurement of capital goods is eligible to exemption from excise duties if the procurement is on the basis of international competitive bidding (ICB). However, all equipments/materials cannot be practically procured under ICB.  Hence, many power plants loose out exemption on a significant proportion of the construction and equipment cost. In appreciation of such practical difficulties, the Ministry of Commerce (MOC) clarified that deemed export benefits should be available on all procurement of capital goods if the mega power project was awarded on the basis of an international competitive bidding. However the excise exemption notification (entry no.91 of Notification No. 6/2006) is yet to be amended. Hence local manufactures are very reluctant to supply capital goods under the above exemption unless the specific supply is under ICB.  Many of the power projects are opting to pay excise duty on local purchase of capital goods and obtain the refund under FTP.  This obviously increases cost and time required for effective implementation of the projects.

The South Block should look at the lacuna and amend the notification so that the local vendor of capital goods need not pay the excise duty first and then rush to RA for reimbursement. The MOC ‘proposes’ and MOF ‘disposes’ style of functioning needs to be given a decent burial and the ensuing Budget is a good platform to trigger this change.

Service tax accounts for a significant portion of the construction cost. Unlike Customs or excise duty, there is no exemption from service tax. Considering the need to reduce the cost of setting up power plants, the Government should consider extending such exemption to service tax also.

Well, these are a few amendments (to the tax positions) on the wish list of power producers that they hope would be addressed by the Honorable FM. If the cry falls in the right ears of South Block, it may result in amendments that could inject adrenalin in to the efforts at boosting the process of setting up power plants in India.

(The views expressed above are personal)