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IMPACT OF TAXATION ON THE INDIAN POWER SECTOR

18TH JULY, 2002 at Hotel Oberoi, New Delhi

EDITED BY PROF S L RAO

INTRODUCTION

Prof S L Rao opened the discussion by commenting that the subject was being discussed for the first time in the power sector and follows the discussions on viability of the sector at the last conference. This conference expects to make a beginning in considering taxation in the power sector by analysing the total impact of taxation in the power tariffs, the impact of taxation, tax incentives and disincentives and how can investors, promoters and managers of projects minimize their tax liabilities. In discussing incentives for example, we will look at issues like accelerated depreciation that has a positive impact on cash flows and profitability but frontloads the tariffs on customers. We found in the CERC that income tax is a pass through item in power tariffs. It is estimated, and on a quarterly basis. As a result, the generators make profit on tax because they get the money in advance, and because it is estimated and not based on actuals. CERC ordered that it should be done on the basis of actuals and the actuals should be that of last year for the present year and the present year’s actuals would be charged next year, with adjustments to be made each year for over or under charging. As far as projects are concerned, only so-called mega projects get customs duty relief on imported equipment. There are excise duties on local equipment, countervailing duties, sales taxes and taxes on works contracts. On fuels there are royalties on coal, gas, etc; hydro generation has a 13% free supply to the originating state; there are varying rates of cess on captive generation and on wheeling; customs duty on gas is ad valorem and with highly volatile gas prices, has frequent additional increases due to the duties; there is central sales tax on interstate movement of fuels; local sales taxes like the penal 22% on gas in Gujarat which has almost all the LNG terminals being established there, giving Gujarat a chance to tax other consuming states; and of course there are octroi and entry taxes. There is an indirect tax because of the transport delays due to these sales and local taxes. There are also direct taxes to be considered. On direct taxes, the issues of Section 10-23G of the Income Tax Act on infrastructure benefits on gross income on interest, dividends, etc have to be considered. The applicability of MAT to power sector is an additional burden. Dividend tax, and the estimation of income tax as a pass through item are other issues that must be considered. We do not expect to cover all issues in depth, nor to come to conclusions in this first conference, but we do hope to develop a plan for future work.

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