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Amended Approach For Indian Power Sector
The Government of India has recently issued notifications limiting the extant benefits of customs and excise available to mega power projects to 111 specified mega and ultra-mega power projects only. Taxand's energy tax team discusses the implications of the notifications on the power sector.
The previous mega power policy laid down general parameters for eligibility towards customs duty exemption and any project meeting those parameters could avail the customs duty exemption.
The recent notifications relating to mega power projects would lead to significant cost enhancement for new power projects - given that power projects have no output tax, they may not avail the benefit of any credits and the entire input side tax becomes a cost for the project. Also, supplies to power projects not included in the list of specified projects may no longer qualify as 'deemed export' under the foreign trade policy.
Given the huge deficit in power capacity addition in India, the issuance of these notifications is surprising and is likely to further dent future investments in power generation. It appears the motive behind this move was driven by the lack of a level playing field vis a vis cheaper Chinese machinery. This could have been achieved by levying basic customs duty of 5%, countervailing duty of nil and additional customs duty of 4%, as originally recommended by the Arun Maira Committee. In the current form, these new notifications restricting customs and excise benefits for power projects will lead to upward pressure on power tariffs and is an adverse development for the power sector.