Govt's decision to cut corporation tax likely to impact power bill

The Union government’s decision to cut the corporation tax is expected to generate savings worth Rs 4,000 crore to power distribution companies. 

Whether the savings will mean cheaper power or not, however, will depend on a host of regulations. The source of power, renewable or non-renewable, and the nature of the market, regulated or merchant, will be a factor in deciding whether the cost would go down. 

Conventional power producers are expected to see limited gains from the tax cut because power purchase agreements (PPAs) require them to pass on tax changes. Renewable power producers, however, may be able to absorb the change and benefit from the reduction. 

“Whether companies must pass on the tax cut or not to the procurer depends on the terms of the power purchase agreement in place. In renewable energy, where the commonly used agreements do not adjust for change in tax, producers benefit from the cut, although this may be partly lost in the various impacts they suffer such as from past tax hits, back-down and delayed payments,” said Kameswara Rao, partner with PWC India. 

According to an ICICI Securities Research note, the impact of these cuts is likely to be positive for the power sector as cash-flows of the entire value chain will improve.” The biggest beneficiaries will be discoms, where annual savings resulting from the cut are estimated at Rs 4000 crore,” said the note dated September 22. 

It is not clear whether the pass-on of tax saving from power producers to distribution companies will translate into lower power tariffs. “Across the regulated utilities space, tax cuts will get passed on to consumers in the next tariff review whenever it comes up. The discoms, however, can ask for the savings to be used for adding capacity or upgrading infrastructure, and the reduction may not directly come to the end customer,” Rao added. 

For power producers, ICICI Securities in its note said, “As most companies are currently under MAT, a small amount related to tax on incentives and other income will be retained by the companies on cost-plus basis while tax benefit on core income will be passed on.” Based on these savings, ICICI Securities expects NTPC earnings to increase by Rs 250 crore current financial year onwards. “Impact on other companies such as JSW Energy and CESC will be negligible as more than 80% of their profits come from regulated businesses, which will be passed on to the consumers,” the note added. 

Gains owing to the tax cut in the regulated transmission space are also expected to be limited. Analysts with Motilal Oswal listed Power Grid Corporation as a nifty company with least earnings revision due to the tax cut. The analysts expect Power Grid’s profit to see a revision of just 0.3 per cent. 

India’s largest coal producer Coal India, however, may see a significant saving. “Coal India was in the highest tax paying bracket with an effective tax rate of 35.62 per cent in FY19. There will be a significant increase in the PAT with its effective tax rate now reduced to 25.2 per cent,” the ICICI Securities note said. With no regulatory obligation to pass on the benefit and in the absence of competition, Coal India will be able to exercise a free choice on what it plans to do with the savings.