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 Clarification with respect to amendments to Customs and Central Excise notifications
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Customs duty tangle to hit power from imported coal
February, 19th 2013

Indian customs authorities have started denying coal importers a duty concession they were granted in last year’s budget and have issued notices to them, said several people aware of the development, raising the possibility of worsening electricity supply in a country where a shortage of domestic coal has already hit power producers.
The issue stems from the interpretation of the exemption, which was granted specifically to steam coal.

Customs authorities have taken the view that the coal being imported for power generation is not steam coal but bituminous coal, and therefore liable for higher duty than the concessional duty of 1% announced in last year’s budget. Customs duty on bituminous coal is 55%.

Steam coal, which once fuelled railway steam engines, is now only used for electricity generation. While most bituminous coal is used for power generation, it can also be used for to produce sponge iron and as a partial substitute for metallurgical coal.

The denial of the budget sop for coal imports would put power utilities in a bind because they have priced electricity after factoring in the concessional duty. Tata Power Co. Ltd, Reliance Power Ltd (R-Power), Adani Power Ltd and JSW Energy Ltd run power plants fired by imported coal. The demand for a higher duty may lower coal imports because producers may not be able to pass on the cost to their customers.

“Yes, all in Gujarat including CGPL (Coastal Gujarat Power Ltd) have received notifications from custom authorities to deposit differential amount on custom duty,” a Tata Power spokesperson said in an emailed statement.

“However, we have taken up the issue with MoP (ministry of power)/MoF (ministry of finance) through industry association to get finance ministry’s classification. Unfortunately, this will amount to a change in law in India and will raise customer tariffs and (will be) against the intent stated by the finance minister in his last budget speech that steam coal for power generation would be exempt from custom duty,” the spokesperson said.

CGPL, a unit of Tata Power, and R-Power are developing large plants capable of generating up to 4,000 megawatts (MW), known as ultra-mega power projects (UMPPs), at Mundra in Gujarat and Krishnapatnam in Andhra Pradesh, respectively, to be fuelled by imported coal.

“This is more activism than enforcement,” a person aware of the development said about the customs department’s stand. “With power generation utilities having burned imported coal all the year round and selling that electricity, how will they recoup expenses (for higher duty) from the buyers with retrospective effect?” The person didn’t want to be named.
The chief executive officer of a power firm, also on condition of anonymity, confirmed the denial of concessional duty on coal imports by customs authorities.

The customs authorities’ move comes in the backdrop of a government decision to grant environmental clearance only to the import of high-grade coal, which could stymie the plans of boosting power generation capacity at UMPPs that rely on overseas coal.

“The regulation of imposition of duty needs to clearly state the basis and cutoff, as also the formulae to establish correlation the bases since coal from various sources may be invoiced on different bases. Disputes are unavoidable in absence of such clarity,” said Dipesh Dipu, a partner at Jenissi Management Consultants, a Hyderabad-based energy- and resources-focused consulting company.

India faces a chronic shortage of the fuel. The country has a power generation capacity of 210,952MW, of which 57.3%, or 120,873.38MW, is coal based. The power sector is the major consumer of the fossil fuel, absorbing nearly 78% of total domestic production.

“Domestic producers of thermal power have been under stress because of high prices of coal,” then finance minister Pranab Mukherjee announced in last year’s budget. “I propose to ease the situation by providing full exemption from basic customs duty and a concessional CVD (countervailing duty) of 1% to steam coal for a period of two years till 31 March 2014.”

The size of the market for imported coal that goes into power generation in India is around 80 million tonnes per annum (mtpa) a year. Coal demand in India is expected to grow from 649 mtpa now to 730 mtpa in 2016-17. The availability of local coal is estimated at 550 mt in 2016-17, with the shortage largely expected to be met through imported coal. India’s overall demand for imported coal is growing and stands at an annual 137 mt.

“Some issues have come up. The exemption to steam coal has been loosely defined,” a government official, who also didn’t want to be identified, said. “While the budget last year had mentioned steam coal, this exemption was meant for the power sector.”

Questions emailed to the chairman of Central Board of Excise and Customs and spokespersons of R-Power, Adani Power, JSW Energy and state-owned trading firm MMTC Ltd late on Tuesday evening remained unanswered.
An unexpected rise in the price of imported coal has caused work to halt at R-Power’s plant in Krishnapatnam, and Tata Power has approached the Central Electricity Regulatory Commission, India’s apex power sector regulator, to consider increases in power tariffs. Both plants were envisaged as fast-track projects requiring investments of around Rs.20,000 crore each.

“Fuel is a major issue and domestic coal availability is unlikely to reach optimal levels in the near term,” wrote UBS Global Equity Research in a 13 February report.

India has a known gross resource base of 264,000 mt of coal, the fourth largest in the world, of which proven reserves are around 101,000 mt.

“Increasing demand of coal in coal-based power plants in India is estimated to grow 7% annually to lead a demand-supply gap of 266 mt in FY2017 (fiscal year 2017),” according to an Icra Management Consulting Services report dated 14 February.

“The import could comprise of 35.5 mt of coking coal and 230 mt of thermal coal. Import demand would be primarily be accounted for by power utilities (190 mt) and steel (36 mt). Although India’s coal needs will continue to be largely met domestically, the share of imports in domestic demand is forecast to increase to 27% in FY2017,” the report said.

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