India: Budget 2016: Key Updates - Energy Sector

Last Updated: 2 March 2016
Article by Trilegal .

The Budget proposals for the energy sector have received a tepid response. While the introduction of a dispute resolution framework for disputes arising in PPP agreements has been received positively, the incentives extended for the renewable energy sector remain below industry expectations.

The Union budget announced on 29 February 2016 offers a mixed bag of proposals for the energy sector. The approach of the government in phasing out corporate tax exemptions to ultimately lower the corporate tax rate appears to have caused confusion in the industry. Further, while certain exemptions have been phased out with clear sunset dates, certain new exemptions have been introduced.

The budget has also addressed the issue of disputes arising in Public-Private Partnership (PPP) agreements, where a legal framework for dispute resolution has been proposed.

Increase in rate of Clean Energy Cess signals a move away from conventional hydrocarbon energy sources, but will raise power generation costs.

Though incentives for the renewable energy sector have been extended, these are well below industry expectations. Notably, restriction of accelerated depreciation benefit will have serious negative implications for investments in this sector. The government has also revised excise duty rates for manufacture of parts used in wind operated electricity generators.

Key policy announcements

– For the purpose of re-vitalising PPPs, the Finance Minister announced the introduction of a Public Utility (Resolution of Disputes) Bill and proposed issuance of guidelines for renegotiation of PPP concession agreements. This is a welcome policy initiative intended to revive stalled infra projects where there is an urgent requirement for a dispute resolution mechanism.

– The government has indicated a commitment towards achieving 100% village electrification by 1 May 2018, which is likely to benefit transmission companies.

– In order to increase investment in nuclear power generation in the next 15 -20 years, a comprehensive plan is proposed to be drawn up.

Key tax announcements

Direct tax

– With a view to completely phase out exemptions and tax incentives, the budget proposes to restrict accelerated depreciation to 40%, from the current 80%, with effect from 1 April 2017. This will negatively impact the demand from financial investors in the renewable energy sector.

– It is proposed that profit linked deduction on eligible business of production of mineral oil or natural gas, will be available only if the specified activity is commenced on or before 31 March 2017.

– An additional depreciation, at the rate of 20%, on acquisition of new machinery or plant is proposed to be extended to assessees engaged in the business of transmission of power.

– The budget seeks to provide that the storage of crude oil by a foreign company in India does not constitute a 'business connection'. Consequently, it is proposed that the income accruing or arising to a foreign company on account of storage of crude oil in a facility in India and sale of crude oil to resident of India (subject to fulfilment of certain conditions), will not form part of total income and therefore, not be liable to tax in India.

Indirect taxes

– The rate of Clean Energy Cess (renamed as Clean Environment Cess) levied on coal, lignite and peat is proposed to be increased to INR 400 per tonne. Such increase will raise power generation costs.

– The budget proposes to revise Basic Customs Duty (BCD) on specific mineral fuels and oils, with benefit of concessional rates.

– Rate of Oil Industries Development Cess, levied on domestically produced crude oil, is proposed to be levied at the rate of 20% calculated ad valorem, against the current INR 4,500 a tonne.

– The exemption from BCD on solar tempered glass / solar tempered (anti-reflective coated) glass used for manufacture in solar cells/modules/panels is now proposed to be withdrawn. Instead, these inputs will now be liable to a BCD of 5 %, subject to an actual user condition.

– Excise duty on carbon pultrusions used for manufacture of rotor blades and intermediates, parts and sub-parts of rotor blades for wind operated electricity generators, is proposed to be reduced to 6 % from 12.5 %, subject to actual user condition (with immediate effect).

– Excise duty on unsaturated polyester resin (polyester-based infusion resin and hand layup resin), hardeners/hardener for adhesive resin, vinyl easter adhesive and epoxy resin used for manufacture of rotor blades and intermediates, parts and sub-parts of rotor blades for wind-operated electricity generators is proposed to be increased to 6 % from nil (with immediate effect).

– The budget proposes to modify conditions stipulated for availing concessional customs and excise duty benefits on machinery required for initial setting up of a project for the generation of power or generation of compressed bio-gas (Bio-CNG) using non-conventional materials.

– The budget proposes to add an explanation under Section 3 of Central Sales Tax Act, 1956. The said explanation will provide that, 'Where the gas sold or purchased and transported through a common carrier pipeline or any other common transport distribution systems becomes co-mingled and fungible with other gas in the pipeline or system and such gas is introduced into the pipeline or system in one State and is taken out from the pipeline in another State, such sale or purchase of gas shall be deemed to be a movement of goods from one state to another'.

Our next update on the budget will focus on some of the major proposals affecting other key sectors in the infrastructure space.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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