Power tax sop may 'pass through' govt firms

Only consumers of govt power companies likely to benefit; under the recent guidelines of the CERC, the benefit has to be passed through rates

The government's boost to the power sector might bring down retail rates but leave a large shelf of projects untouched. This implies there could be cheer in store for consumers of government companies but little relief for promoters.

A 10-year income-tax holiday has been made available for all generation, transmission and distribution projects coming up before March 31, 2017. The benefit from this, however, has to be passed through to rates under the recent guidelines of the Central Electricity Regulatory Commission (CERC).

In his Budget speech, Finance Minister Arun Jaitley extended the tax holiday, which had expired in March, by another three years. However, the CERC guidelines, which became applicable from April 1, limit the benefits that could accrue to government-owned companies like NTPC, NHPC and Power Grid.

NO HOLIDAY?

Govt firms won't gain from tax breaks

• Section 80 IA of the I-T Act allows deduction of profits and gains to undertakings set up for generation, transmission and distribution of power between April 1, 1993, and March 31, 2014
• The terminal date extended till March 31, 2017, coincides with the 12th Five-Year Plan
• CERC tariff guidelines require tax benefit to be passed through in tariff to consumers
• The guideline are not applicable to the private players that bagged projects through tariff-based bidding

"The contradiction of this tax benefit with CERC's tariff (rate) guidelines for power generators and those in the transmission business needs to be sorted first," said a senior executive in one of the companies.

If it was not for the CERC guidelines, NTPC's projects Barh Stage-II (1,320-Mw), Koldam (800-Mw) and Nabinagar, BRBCL (500-Mw), to be commissioned in 2015, could have benefitted from this tax holiday.

According to CERC's recent regulation, the effective tax rate is to be calculated at the beginning of every financial year on the basis of the estimated profit and payable tax, in line with the provisions of the Finance Act applicable in that year - excluding the income of non-generation or non-transmission businesses and the corresponding tax thereon. "In the case of generating companies or transmission licensees paying Minimum Alternate Tax (MAT), the effective tax rate will be considered as MAT rate, including surcharge and cess," says the CERC(Terms and Conditions of Tariff) Regulations, 2014.

In earlier years, when the new guidelines were not applicable, if a company managed to save on tax due to its smart planning, it was allowed to retain such gains, said a power generation company executive.

According to Sambitosh Mohapatra, executive director, PricewaterhouseCoopers, however, the promoters bagging projects under the rate-based bidding regime would still benefit from the tax holiday. These companies include Avantha Power, Jindal Steel & Power Ltd, Lanco, GMR and Essar. "They would have planned their project at 30 per cent corporation tax but would now have to pay only 20 per cent MAT," he said.

EY Partner Samir Kanabar, however, said the tax holiday did not bring much benefit to anyone because of MAT. "Without a tax holiday, the effective tax rate for a company worked out to 24-26 per cent. So, with MAT, the benefit under a tax holiday would be only about five per cent," said Kanabar. Also, though a company could claim credit on MAT after the end of the 10-year holiday, the time value of the money paid as MAT would have been lost, Kanabar added.

NTPC is already locked in a legal dispute with CERC over the new rate guidelines. The regulator had altered various parameters for determining rates which NTPC said would impact its return on equity. NTPC approached the Delhi High Court to seek modifications in rate guidelines for five years starting April 1.