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Make mergers tax-efficient
June, 19th 2009

Realisation of a strong power infrastructure, implicit investor confidence with a capacity addition of 1,000 MW each year has unfortunately, been punctuated by many loopholes in the power sector.

The gaps can be attributed to misuse of The Electricity Act, 2003 by certain state governments, their lack of accountability, and financial vulnerability of independent power producers. Certain amendments in the Budget need to be seriously considered, for this sector to see the growth it truly deserves.

In view of the ever increasing thrust for growth of the power sector, huge investments are anticipated to be undertaken in the sector in year 2010 and 2011. However, the sunset clause in the tax exemption provisions (generation and distribution of power is eligible to a 10-year tax holiday provided the undertaking begins to generate power any time before March 31st, 2010) and applicability of MAT is bound to discourage future investments in this sector.

The liability to MAT during the tax holiday period to a great extent offsets the benefits of tax holiday and defies the overall intent for extending tax sops for power sector. The anomaly should be reviewed and the tax and MAT applicability exemption of 10 years should be enforced, irrespective of the year of commencement of power generation and distribution. To provide an even ground for all the players, electricity should be a 'declared good'. The capital investments in the power sector are astronomical; a power generator is only eligible to claim depreciation on plants and machinery at a rate of 15% on written-down value basis. It is therefore, imperative that the generator be allowed to claim a depreciation ranging from 40-80%.

The IT Act prohibition of tax exemption for organisations post merger/ de-merger should be eliminated as mergers/ de-mergers are a norm to increase efficiency.

Pursuant to the insertion of entry 91A vide notification number46/2008, no consequent amendment has been made in Rule6 (6) of the credit rules. As a result, manufacturers supplying goods to ultra-mega power projects would not be able to avail the input credit and would thus be forced to pass on the additional cost, thereby rendering UMPPs worse off as compared to mega power projects from a tax cost perspective. The government should redress this anomaly by amending the credit rules to specifically refer to entry 91A.

Lastly, efforts should be made to stop the stepmotherly treatment of captive power plants; they are neither covered under any of the existing exemptions or concessions under customs and central excise laws for power projects nor are they eligible for benefits under project import scheme. I seek specific concessions for captive power plants.

 
 
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