Tax sops sought for power sector

Sayeed wants infrastructure status for power distribution business

The power ministry has urged the government to allow central power utilities to float tax-free bonds to partially fund their investment plans.

It has also sought 100 per cent duty exemption for electrical systems and fuel used in rural areas and tax waiver for funds mobilised by companies to set up a decentralised rural electricity infrastructure.

In a list of proposals submitted to Finance Minister P Chidambaram for the forthcoming Budget, Power Minister PM Sayeed sought infrastructure status for the power distribution business on the lines of that for transmission companies, which now pay 5 per cent Customs and 15 per cent countervailing duty, officials told Business Standard.

Sayeed has also urged the government to classify naphtha, natural gas and liquefied natural gas "" used as fuel for electricity generation "" as declared goods under the Central Sales Tax (CST) Act.

This will make them eligible to pay 4 per cent CST. At present, this varies among states, with sales tax as high as 22 per cent in some states. By pushing for amendments in the mega power policy, the power ministry also proposes to allow duty-free import of generation equipment for a large section of power producers.

"The thrust is to reduce the cost of power not just for farmers and individuals but also for the industrial sector, to make it more competitive globally. While administrative action and competition will reduce costs, fiscal incentives, at least in the medium term, will go a long way in achieving the objective," an official said.

Officials said the power sector would require investments of Rs 900,000 crore over the next 10 years. They added that the power minister had proposed that the facility to issue tax-free bonds under Section 10(15) of the Income Tax be made available to PSUs till 2012, the target for implementing the government's power-for-all programme.

The tax benefits are part of the Rs 17,000 crore plan to electrify all villages in the country over the next five years.

The power ministry has circulated a draft Cabinet note to the ministries concerned for comments on the scheme.

Officials said tax sops for rural electrification were expected in the Budget since the move would not result in a substantial loss to the exchequer.

Tax benefits for public sector units will be more difficult to come through since the facility can result in investments moving away from term finance institutions.

The Section 10(15) benefit was available to the National Housing Bank, Industrial Development Bank of India, ICICI, IFCI, Exim Bank and Small Industries Development Bank of India till 2002.

Power ministry's proposals

• PSUs be allowed to issue tax-free bonds till 2012 to part fund Rs 900,000 crore investment in the power sector
• 100% duty exemption for dedicated generation, transmission and distribution systems for rural areas
• Funds mobilised for decentralised rural power infrastructure should be exempted from taxes
• Infrastructure status for distribution companies
• Naphtha, natural gas, LNG should be classified as declared goods under the Central Sales Tax Act