The coming Union budget could scrap the 5% import duty on coal meant for power projects—a move that will help meet demand for the fuel in a country that is perennially short of it and where 70% of power is still generated from it.
“The announcement will be made in the (Union) budget. Given the coal shortage in the country, this step had to be taken,” said a senior government official who spoke on condition of anonymity.
Indian energy producers consume 78% of the total domestic output of coal.
“We have asked for it (the cut in duty) given the shortage of coal in the country. We may get it,” added a senior power ministry official who also did not want to be identified.
The finance ministry’s views on the duty cut could not be confirmed because it is in quarantine during the last phase of preparations for the Union budget, which will be presented on 16 March.
The size of the market for imported coal that goes into power generation in India is around 80 million tonnes (mt) a year. The demand-supply gap is expected to touch 450 mt by 2017, which is largely expected to be met through imported coal. It takes around 5,000 tonnes of coal to generate 1 megawatt of power.
“The import duty waiver is likely to bring relief to power projects, particularly those... where the bid clauses restrict pass-through of high imported coal costs to the power procurers. The cost of procurement of imported coal has been high and is rising, and the import duty on a higher base has led to a compounding effect,” said Dipesh Dipu, director (consulting, energy and resources, and mining) at audit and consulting firm Deloitte Touche Tohmatsu India Pvt. Ltd.
Doing away with the import duty on coal will also help state-owned Coal India Ltd (CIL), which was recently asked by the Prime Minister’s Office (PMO) to sign fuel supply agreements (FSAs) to solve the ongoing fuel crisis. An FSA guarantees coal supply and is a legally binding document that will, in this case, require CIL to supply the quantum agreed upon. As a part of the relief package, the PMO stated, “In case of any shortfall in fulfilling its commitment under FSAs from its own production, CIL will arrange for supply of coal through imports.”
Dipu added that while it is clear that CIL will not supply imported coal at the same price at which it sells domestic coal, the duty cut could see the cost of imported coal fall and, consequently, help the state-owned company find willing buyers.
CIL committed to supply 347 mt of coal to power generators in 2011-12 and by 31 March, the end of this fiscal, it will have supplied 320 mt. It has committed to supplying 452 mt in 2012-13. India has 75 thermal power projects that depend on CIL for supplies.
The budget may also withdraw the 5% import duty on liquefied natural gas that is used as fuel in power generation projects to offset sharp spikes in the price of imported natural gas. This is a long-pending demand of the power ministry, although the finance ministry has chosen to ignore it in earlier budgets.
The power ministry has also asked for the removal of withholding tax on overseas investments in power in an attempt to attract investments. Withholding tax is charged on the repatriation of income from equity or debt. India’s power sector is already struggling with a shortage of capital, with the power ministry estimating that $400 billion (Rs.19.6 trillion today) of investment will be required during the 12th Five-Year Plan (2012-17).
The power ministry has made 47 demands of the finance ministry, of which 17 are related to taxes.
The power ministry also wants finance minister Pranab Mukherjee to extend the tax holiday on power projects. The tax break under section 80-IA of the Income-tax Act ends on 31 March 2012, making any power project that starts operating after that date ineligible for the benefit. The law allows a developer to claim tax exemption of up to 10 years within the first 15 years of a project’s commissioning.
The budget may also announce incentives for promoting the use of energy-efficient appliances and light-emitting diodes for lighting.
Source : livemint.com