The Union ministry of power has amended the power tariff notification to severely curtail the income available to power companies' and thereby put a cap on the chargeable tariffs. Many of the ongoing power projects may have to rework their power purchase agreements as a result.
The notification issued on June 9, 1998 curtails the incomes by not permitting tax exemptions on all criteria. Henceforth, the tax would be restricted to specified income streams of each project and not based on general parameters.
The earlier notification was very broad-based and had allowed all taxes to be recovered from the power tariff. As a result, a promoter was not only not bearing any tax on account of power generation, he also stood to recoup large sums of profits by improving the generation standards, in terms of heat rates.
Under the notification , the government has specified that the power companies are required to treat physical parameters on the basis of actuals or on the basis of the specified norms, whichever is lower.
These physical parameters include `station heat rate', `secondary fuel oil consumption and `auxiliary consumption'. Under the earlier norms the government had only indicated a ceiling for the above parameters which allowed power companies the scope to earn profits on these accounts.
The tax on the additional income arising from this was being passed onto the power tariff which would be borne by the consumers. The earlier notification was very broad-based and had allowed all taxes to be recovered from the power tariff.
The finance ministry, the Central Electricity Authority and state electricity boards were of opinion that the tax on the profits arising out of the savings should be borne by the power company and cannot be passed on to the tariff.
As a fallout of the above the new government has clearly spelt out the income stream available to the power company. It spells out that the power companies can recover tax from the power tariff for calculating the 16 per cent return on equity and on account of the extra rupee liability on account of variations in foreign exchange while calculating the return of equity.
It further adds that tax on other income streams cannot be recovered from the tariff and will have to be borne by the company.
The notification further specifies the power companies any other additional recovery of tax will be adjusted every year on the basis of a certificate of statutory auditors.
