Has India Inc done enough to improve investment in power sector? are
investors satisfied with the incentives available to investment in
power sector ? let us take a sneak preview of the present situation of
the power sector and the expectations that the power sector has from
the Budget 2009.
According to the report from the Central Electricity Authority (CEA),
at present, India has an installed power generation capacity of around
147,000 Megawatts ("MW") – a current deficit of almost 20,000 MW.
Equally important are the transmission and distribution activities for
power. Recent estimates indicate that to sustain a level of GDP growth
rate of 8% until 2012, India would need to increase its installed
capacity to 227,000 MW. Even in a low growth scenario of 4%, India
would still require an installed capacity of 183,000 MW by 2012.
Clearly, the country's economic growth runs the risk of being derailed
if urgent steps are not initiated to overcome the substantial power
deficit.
This indicates a requirement for significant investment in the power
industry. Although a proportion of this investment will be made by
the public sector to achieve capacity additions of the magnitude
required, substantial private investment is a must.
One of the most difficult challenges faced for infrastructure projects
is to achieve financial closures for the project – this is more so the
story for power projects. Obviously, to attract private investment,
the Government needs to give appropriate carrots to investors by
providing incentives to investors – one important form of incentive
for investors is tax breaks and exemptions and a consistent tax
policy.
In contrast, the Government took two steps backwards in 2007, when the
Budget rolled out complete overhaul of the tax provisions relating to
income of venture capital funds investing in the power sector.
Under the erstwhile provisions, income of venture capital funds from
investments made in any sector was not subject to tax in the hands of
the fund, but was taxable in the hands of the investors thereby
according a pass through status to the fund and taxing the investors
directly.
However, with the changes made in 2007, the tax exemption available
under Section 10 (23FB) and the pass through status accorded under
Section 115U was restricted to investment made only in specified
sectors. More importantly, while this list contains most activities
that ordinarily classify as infrastructure development (for eg., road,
ports, airports, water supply, etc), the power industry which is a key
to India's economic development was missed out. This resulted into
step motherly treatment to the power sector given the need for
development of massive power infrastructure.
Given this clear mismatch, it is imperative that the Finance Minister
appreciates the need of the hour and makes necessary amendments to
these provisions while presenting this year's budget and include power
sector as one of the sectors in which investment would qualify for
pass through treatment for the fund. Of course, the preference may be
given to all sectors which can be classified as infrastructure, but
including the power industry may be a good start to begin with. Such
an amendment, if implemented, would clearly attract venture capital
funds investment in this investment starved sector.
One other area that the Finance Minister needs to address in this
budget is the tax holiday provisions relating to the power sector.
Currently, tax holiday is available to undertakings which commences
power related activities (whether generation, transmission or
distribution) by 31 March 2010. Given the time period required to set
up power plants to meet with the deficit situation, this time limit
should be extended to at least 31 March 2015 so that there is enough
visibility to the players who proposes to make investment in the power
sector. This will also attract investment in the sector as well as
new players.
Also, given the huge requirement for capacity additions and the
evolving business environment which is waking up from recessionary
trends, there are tremendous opportunities of consolidation in the
form of inorganic growth. Mergers, acquisitions, sell-offs are likely
to be the order of the day. In such an era, restriction of benefits
on account of restructuring or acquisitions would hamper the growth of
the industry. In order to support the sector, the Finance Minister
should consider the removing the restrictions introduced in section
80IA(12A) by the Finance Act, 2007 and reinstate the benefits to the
transferee entity on transfer of undertaking under amalgamation
/demerger.
Power sector will continue to be focus area of the Government as well
as the investors given the huge demand supply gap and getting the
right investment is also essential. The Finance Minister should
consider implementing some of the requests of the sector as it would
help the sector to attract significant investments, which would give
the much needed fillip to this sector.
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