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Wind power needs a tax incentive on the power produced
May, 09th 2012

On the list of items on which revenue has been forgone on account of various tax incentives to boost output, the head 'accelerated depreciation' is by far the largest, adding up to over Rs 36,000 crore. The list does not give a further break-up of the revenue given up sector-wise, but that for wind power would be significant and also inappropriate.

The fact of the matter is that the plant load factor (read, capacity utilisation) for operational wind power generating units can be a low single digit (due to lack of wind speed, inefficient turbines, etc) and the provision of 80% depreciation on capital equipment, as against the usual rate of 15%, really amounts to gross misallocation of resources. The tax break was supposed to end with the fiscal year on March 31, but there have since been conflicting reports that it would be revived.

The idea needs to be nipped in the bud. Tax incentives are distorting, and anyway 80% depreciation simply revs up wind power capacity, never mind efficiency and rationale. It is no wonder that India now has one of the largest installed wind power capacities globally. Given that wind power is hugely capital intensive , continuing with the upfront tax break amounts to a perverse incentive. As wind power costs Rs 4.5-5 crore per megawatt of capacity, with over 15,000 mw already installed, it implies an investment of about Rs 75,000 crore although actual generation is poor. We need to focus on schemes to step up actual generation. We do need proactive policy to add power from renewables and other non-conventional sources for enhanced energy security.

Hence the need for generation-based incentives for wind power that put a premium on actual output rather than on generation capacity. Wind power projects are anyway exempt from income tax on all earnings for any single 10-year period during the first 15 years. Reportedly, the government, apart from rolling back the accelerated depreciation benefit for wind power, has also withdrawn the sop of Rs 0.50 per unit available as generation-based incentive. There seems a strong case for continuing with the latter benefit for the current Plan period and beyond.

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