Power: Sector reforms inspired by the Gujarat model

The Budget has focused on two key areas of power reforms - revival of the distribution sector and clean-energy generation - inspired from the Gujarat model. The reforms include tax breaks and duty benefits for fresh capacity creation.

Finance Minister Arun Jaitley announced the replication of Gujarat's Feeder Segregation Programme, which divides rural transmission lines into two parts, through the Deendayal Upadhyaya Gram Jyoti Yojana and allocated Rs 500 crore to the scheme.

Jaitley also extended the ten-year tax holiday, under the Income Tax Act, for all power projects to be set up by March 2017. The incentive allows companies to claim deduction up to 100 per cent on profits for 10 years. This means companies will pay only 18.5 per cent minimum alternate tax (MAT) on book profits, instead of corporate tax, as 100 per cent deduction would bring the tax to a level lower than MAT in almost all cases. The rule is if corporate tax incidence falls below MAT, the latter will apply.

The minister also sought to give a push to solar power setting aside Rs 500 crore for developing four ultra mega solar power projects in Rajasthan, Gujarat, Tamil Nadu and Ladakh. Work on one such 4,000-megawatt project, near the Sambhar Salt Lake in Rajasthan, is on with an estimated investment of Rs 7,500 crore. Jaitley also allocated Rs 400 crore for installing 100,000 solar-power driven agricultural pumps.

The Budget also provides for a green-energy-corridor project this year under which alternative transmission infrastructure for renewable power will be set up at an estimated cost of Rs 43,000 crore. The minister also incentivised solar power equipment manufacturing with a concessional basic customs duty (BCD) of five per cent and reduced the BCD on steel rings used in wind-energy generators from 10 to five per cent.

The Budget raised the clean energy cess on coal from Rs 50 per tonne to Rs 100 per tonne. The proceeds are channelised to the National Clean Energy Fund, used for research.

The Budget provisions received a thumbs-up from experts. "In the power distribution segment, Rs 500 crore for feeder separation is a good move to improve power quality in rural areas. But the allocation seems to be too little to make any real impact. But the increase in clean-energy cess, with an earlier increase in railway freight rate, will impact power rates 14-15 paise a unit," said Debasish Mishra, senior director at Deloitte.

He added the extension of the tax holiday will lend certainty to investments. While the minister promised ramping up the coal supply for stuck projects, he did not announce any clear strategy. According to ratings agency ICRA, the rise in coal cess and a marginal increase in customs duty on steam coal (from nil to 2.5 per cent) would lead to a rise in the cost of power generation by 2.5 paise a unit, which pressure retail rates.