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Ministry wants service tax exemption
February, 18th 2010

The power ministry has sought scrapping of service tax for power sector projects in the Budget for 2010-11 an exemption that infrastructure projects such as roads, airports, railways and bridges already enjoy.

We have been asking against service tax and have been arguing for this exemption as has been made for other infrastructure projects, said a top power ministry official, who did not want to be identified.

A 10% service tax is currently levied on power sector projects, after a 2 percentage points cut last February as part of the stimulus package.

Service tax receipts in 2009-10 are expected to add up to Rs65,000 crore, according to budget estimates.

There has been a lot of contention about the same. We have asked for an exemption, said another power ministry official, who also did not want to be identified.

Mint could not independently verify the power ministrys demand for service tax exemption from the finance ministry.

Finance minister Pranab Mukherjee will present the 2010 Budget to Parliament on 26 February.

With the government proposing a capacity addition target of around 100,000MW in the 12th Plan (2012-17), the power ministry believes service tax exemption would help utilities in generation, transmission and distribution of electricity and in reducing the tariff for consumers.

India has a power generation capacity of 153,000MW and plans to add 78,577MW by 2012. The countrys inter-regional transmission capacity of 20,800MW is expected to go up to 37,000MW by the end of the 12th Plan period.

Any exemption of service tax will result in lower cost for the developer and lower tariffs for the end users. Even if GST (goods and services tax) happens, exemptions to infrastructure sector will continue, said Shubhranshu Patnaik, an executive director at audit and consulting firm PricewaterhouseCoopers.

GST is Indias most ambitious indirect tax reform, which seeks to stitch together a common market and reduce costs to replace the current fragmented tax regime to move to a unified tax regime for goods and services.

It has been held up by a growing distrust between the Union government and the states, and the latters reluctance to give up their powers to levy taxes.

In the proposed system, tax will be levied at the point of consumption and a predetermined amount will be split between the Centre and the states. The major indirect taxesCentral excise, service tax and value-added tax (VAT)will be bundled into GST, which should eventually translate into a lower tax rate.

The power ministry has also sought the finance ministrys intervention for extending the tax holiday on power projects, as reported by Mint on 12 February.

The tax break ends on 31 March 2011, making any power project that starts operating after that date ineligible for the benefit.

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