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Overview
Budget 2010 carries proposals involving enhanced financial outlays for the renewable energy industry, and introduces carbon tax on production and importation of coal. The thrust for clean energy is supplemented by lowering of duties for solar, wind and other sources of renewable energy generation, and the creation of the National Clean Energy Fund.
The partial roll back of the stimulus has led to re-introduction of taxes and duties on crude oil and petroleum products, which will impact fuel prices. Direct tax proposals specific to the energy sector are limited, with material movements in the duty structure of indirect taxes for petroleum and renewable energy industry.
The attention and advocacy efforts of the industry will shift to the proposals of the Direct Tax Code and the Goods and Services Tax, which was reiterated by the Finance Minister to come into effect on April 1, 2011. These new laws along with the policy reforms being articulated in the National Missions for Climate Change and rationalisation of downstream petroleum prices later in the year will define a new fiscal and regulatory landscape for the energy industry.
Recent Regulatory Developments
Oil & Gas
The Economic Survey 2009 presented last year reiterated the long standing need for reforms in the downstream oil & gas sector of India. In line with the government agenda set out in the Survey, the Petroleum Ministry constituted an Expert Group Committee led by Dr Kirit Parikh to advice on viable and sustainable system of pricing of sensitive petroleum products. The Expert Group submitted its recommendations on February 3, 2010. The key recommendations are as follows:
Petrol and Diesel
| • | Market determined prices for petrol and diesel |
| • | Additional excise duty on diesel vehicles corresponding to the differential excise duty on petrol and diesel prices |
PDS Kerosene and Domestic LPG
| • | Import parity pricing methodology for calculation of under recoveries |
| • | Target subsidy for PDS Kerosene and Domestic LPG by use of smart cards/UID framework |
Power
Revised mega power policy
In December 2009, the Ministry of Power modified the mega power policy as follows:
| • | All fiscal benefits under the mega power policy except a basic customs duty of 2.5 percent to be extended to the brownfield expansion projects |
| • | Elimination of the mandatory condition of inter-state sale of power for obtaining the mega power project status |
| • | No requirement for International Competitive Bidding for procurement of equipments for mega projects if the requisite quantum of power has been tied up or the project has been awarded through tariff based competitive bidding |
| • | Existing condition requiring privatization of distribution of power purchasing states replaced with the condition that States undertake to carry out distribution reforms as laid down by the Ministry of Power |
| • | Mega power projects may sell power outside long-term Power Purchase Agreements (PPAs) in accordance with the National Electricity Policy and Tariff Policy 2006 |
| • | Present dispensation of 15 percent price preference available to domestic bidders in case of cost plus projects of PSUs to continue. The price preference will not apply to tariff based competitively bid projects of PSUs |
Inter-state trading margins regulations
CERC issued new regulations fixing trading margins for short-term buy/sell contracts for inter-state trading of electricity
Renewable energy
To address the opportunities from new technologies and challenges from climate change, the Government of India has revamped the regulatory framework for renewable energy sector comprising the following:
| • | Launch of eight Missions in June 2008 as a part of the National Action Plan on Climate Change (NAPCC) in specific areas (ie Solar Energy, Enhanced Energy Efficiency, Sustainable Habitat, Water, Sustaining the Himalayan Eco-system, Green India, Sustainable Agriculture and Strategic knowledge for Climate Change which include assessment of the impact of climate change and actions needed to address climate change). Of these, the Solar Mission and the Mission on Enhanced Energy Efficiency were formalized |
| • | Creation of Bureau of Energy Efficiency (BEE), a statutory body, under the Ministry of Power, Government of India to promote energy efficiency in the country. Bachat Lamp Yojana for promoting use of CFL is one of the important initiatives undertaken by BEE in this regard |
| • | Formalization of new tariff regulations for renewable energy projects (wind, solar, bio mass, hydro etc) for promoting fresh investments in this sector. These regulations inter-alia prescribe ROE, tariff structures, capital cost norms, O&M norms, CDM sharing mechanisms, etc
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| • | Announcement of National Policy on Biofuels for an optimal development and utilization of indigenous biomass feedstocks for production of biofuels. The Policy sets out the vision, medium term goals, strategy and approach for biofuels development, and proposes a framework of technological, financial and institutional interventions and enabling mechanisms |
| • | Renewable energy Purchase Obligation (RPO) mandating the State Electricity Commissions to purchase a specified percentage of power from renewable energy sources (varying from 1-10 percent) |
| • | Generation Based Incentive (GBI) Schemes for solar and wind energy projects |
| • | Feed in tariffs for solar energy announced by several States |
| • | Formulation of Renewable Energy Certificate (REC) mechanism to facilitate inter-state transaction of Renewable Energy sources by issuance of transferable and saleable credit certificates. Under the new regulation, there will be a central level agency designated by the Central Commission for registration of generators participating in the scheme. This agency will help generator by providing a single window for seeking registration and issuance of certificates |
Policy Announcements In Union Budget 2010
Oil & Gas
| • | Decision on the recommendations of the Kirit Parikh Committee on a viable and sustainable system of pricing of petroleum products to be separately taken by the Minister of Petroleum & Natural Gas |
Power
| • | Plan allocation for power sector increased from INR 22.3 billion in 2009-10 to INR 51.3 billion in 2010-11 |
| • | Introduction of competitive bidding process for allocating coal blocks for captive mining |
| • | Government proposes to take steps to set up a "Coal Regulatory Authority" for facilitating issues including economic pricing of coal and benchmarking of standards of performance |
Renewables
| • | Increase in outlay for the Ministry of New and Renewable Energy by 61 percent from INR 6.2 billion in 2009-10 to INR 10 billion in 2010-11 |
| • | Proposal to set up solar, small hydro and micro power projects at a cost of about INR 5 billion in Ladakh region of Jammu and Kashmir |
| • | To ameliorate the negative environmental consequences and increased pollution levels associated with industrialization and urbanization, the Budget proposes as follows:
| o |
Setting up of National Clean Energy Fund for funding research and innovative clean energy technologies; |
| o | The fund to be capitalized by levy of carbon tax on coal produced domestically as well as imported coal at the rate of INR 50 per tonne (As per Finance Minister’s Budget speech) |
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Direct tax
| • | Taxation on deemed profit basis denied to non-resident oil-field services providers in relation to activities that qualify as Fees for Technical Services (FTS) or royalties when:
| o |
Non-resident or foreign company carries on business in India through a permanent establishment and the right, property or contract in respect of which the FTS or royalties are paid is effectively connected to such permanent establishment; and |
| o | Services are rendered or facilities provided to an Indian concern or Government |
The determination of which services and facilities fall within the complex definition of FTS and royalty can be a matter of significant debate and controversy |
| • | The business of laying and operating a natural gas or crude or petroleum oil pipeline network for distribution, including integral storage facilities is eligible for investment-linked incentive mechanism which effectively provides 100 percent deduction for all expenditure. The eligibility criteria for this incentive now aligns the common carrier requirements with the regulations specified by the Petroleum & Natural Gas Regulatory Board. As per the current guidelines, this amendment will reduce the threshold limit for common carriage by petroleum pipelines from one-third to one-fourth |
| • | Other generic tax proposals which have implications for the energy industry include:
| o |
The rate of Minimum Alternate Tax (MAT) increased from 15 percent to 18 percent |
| o | Surcharge on domestic companies reduced from 10 percent to 7.5 percent |
| o | Services do not need to be rendered in India for being deemed to accrue or arise in India |
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| • | No proposal to settle the controversy on availability of tax holiday for natural gas production from pre-NELP and first seven rounds of NELP |
Indirect tax
Oil & Gas
| • | Excise duty rates on motor spirit (petrol)
Excise duty rate on branded and non-branded petrol has been enhanced by INR 1 per litre. The specific basic excise duty rate on branded petrol has been increased from INR 6.50 per litre to INR 7.50 per litre. Specific basic excise duty rate on non-branded petrol has been enhanced from INR 5.35 per litre to INR 6.35 per litre.
The change in excise duty rates on branded and non-branded petrol is captured below.
| Period |
Excise duty rates (excluding education cess) for Non-branded Motor Spirit |
Excise duty rates (excluding education cess) for Branded Motor Spirit |
Pre-budget
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INR 13.35 per litre |
INR 14.50 per litre |
Post-budget
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INR 14.35 per litre |
INR 15.50 per litre |
*Additional excise duty of INR 2 per litre and special additional excise duty of INR 6 per litre has been added to the specific basic excise duty rates for branded and non-branded petrol |
| • | Excise duty rates on High Speed Diesel Oil (HSD)
Excise duty rate on branded and non-branded HSD has been enhanced by INR 1 per litre. The specific basic excise duty rate on branded HSD has been enhanced from INR 2.75 per litre to INR 3.75 per litre. For non-branded HSD, specific basic excise duty rate has been increased from INR 1.60 per litre to INR 2.60 per litre
| Period |
Excise duty rates (excluding education cess) for Non-branded HSD |
Excise duty rates (excluding education cess) for Branded HSD |
Pre-budget
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INR 3.60 per litre |
INR 4.75 per litre |
Post-budget
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INR 4.60 per litre |
INR 5.75 per litre |
*Additional excise duty of INR 2 per litre has been added to the specific basic excise duty rates for branded and non-branded HSD |
| • | 4 percent excise duty imposed on Avgas |
| • | Carbon Black Feed Stock exempted from additional Countervailing Duty (CVD) |
| • | No change in excise duty rates of other petroleum products |
| • | Customs duty rates on crude petroleum and refined petroleum products modified as under:
| o |
Basic customs duty (BCD) on crude petroleum increased from nil to 5 percent |
| o | Enhancement in BCD on petrol and HSD from 2.5 percent to 7.5 percent |
| o | BCD on specified petroleum products increased from 5 percent to 10 percent (except naphtha, LPG, LNG, Petroleum Gases and Pet Coke) |
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| • | Service tax jurisdiction, which earlier extended to ‘installations structures and vessels in the continental shelf of India and the exclusive economic zone of India’ is modified as under:
| SI. No. |
Place of performance of service |
Nature of service |
1
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The continental shelf and exclusive economic zone of India |
Any service provided for all activities pertaining to construction of installations, structures and vessels for the purposes of prospecting or extraction or production of mineral oil and natural gas and supply thereof |
2
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Installations, structures and vessels within the continental shelf and the exclusive economic zone of India, constructed for the purposes of prospecting or extraction or production of mineral oil and natural gas |
Any service provided or to be provided by or to such installations, structures and vessels and for supply of any goods connected with the said activity |
However, for the purposes of export/import of services, ‘India’ has been defined to include ‘installations structures and vessels located in the continental shelf of India and the exclusive economic zone of India, for the purposes of prospecting or extraction or production of mineral oil and natural gas and supply thereof’. The distinction between ‘India’ as defined for export/import of services vis-à-vis for service tax jurisdiction requires clarification |
Power
| • | Import of electrical energy (including removal from SEZ to DTA and non-processing zones of SEZ) attracts BCD at a specific rate of INR 2,000 per 1,000 kWh. The same was, however, wholly exempt from customs duty by a separate notification. This exemption has now been partly rolled back. Consequently, electrical energy removed from SEZ to DTA and non-processing zones of SEZ would now attract customs duty at 16 percent ad-valorem plus nil additional CVD with retrospective effect from June 26, 2009. Exemption from customs duty would continue on other supplies or import of electrical energy
While availing the above exemption, the dichotomy between the specific tariff rate and ad-valorem rate for the purpose of exemption merits consideration |
| • | Clean energy cess imposed as a duty of excise on coal, lignite and peat produced in India. Import of coal to also attract clean energy cess (to be collected as CVD). Under the relevant schedule to the Finance Bill, 2010, clean energy cess is specified at INR 100 per tonne. The Finance Minister has however indicated a rate of INR 50 per tonne in the Budget speech. Provisions of Central Excise Act, 1944 are expected to be made applicable to clean energy cess
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| • | Exemption from excise duty on goods supplied to mega power projects from which the supply of power has been tied up through tariff based competitive bidding or a mega power project awarded to a developer on the basis of such bidding, subject to specified conditions. Additionally, CENVAT credit on inputs used in the manufacture of such goods is allowed |
| • | Transmission of electricity exempt from levy of service tax |
Renewables
| • | Photovoltaic and solar thermal power generating projects: Concessional BCD of 5 percent and excise exemption (and consequently CVD) on all items of machinery including prime movers, instruments, apparatus and appliances, control gear and transmission equipment and auxiliary equipment and components required for initial set up
Thus, concessional BCD rate of 5 percent for such projects would not involve procedural complications of ‘project imports’. Additionally, coverage of excise duty/CVD exemption in respect of capital goods for such projects has now been widened |
| • | Geo-thermal energy: Ground Source Heat Pumps exempt from BCD and additional CVD |
| • | Wind energy generators: Existing exemption from excise duty on specified goods such as epoxy resin, adhesive resin, vinyl ester adhesives etc used for the manufacture of rotor blades is now extended to polyester based infusion resin and hand layup resin (both covered under HSN 3907 9190) and gel coat and hardener (both falling under HSN 3208 1090) used with such polyester based resins |
| • | LED lights: Excise duty reduced from 8 percent to 4 percent |
| • | Import of compostable polymer exempt from BCD |
Miscellaneous
Service tax exemption on transportation by railway has been withdrawn (except petroleum products booked by public sector oil marketing companies transported by Indian Railways). Consequently, cost of transportation of petroleum products, coal, etc by rail is likely to increase
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