Correction Of I-T Anomaly To Speed Up Power Projects
A major deterrent to the financial closure of the counterguaranteed power projects has been removed with the government deciding to amend the Income Tax (IT) Act to bring the depreciation provisions in alignment with that provided under the Electricity Supply Act, top power ministry officials said.
The officials disclosed that this had been endorsed by finance ministry on Monday and a Cabinet note will be moved to make the necessary amendment in the IT Act only with respect to power companies. Revenue department officials when contacted, confirmed that a decision had been taken at the level of the finance minister.
Significantly, the decision precedes the departure of the high-level team to the United States, led by secretary T S R Subramanian, to hard-sell several infrastructure projects, including projects in the power sector. The clinching of this critical issue would apparently enhance the prospects of the delegation in clinching further deals.
The immediate beneficiaries will be the ST-CMSs 250 mw Nevyeli Zero Unit, Cogentrixs 1000 mw project, Hinduja-National Powers 1000 mw Vishakapatnam power project and Ispats 1000 mw Bhadravati project.
Meanwhile, experts opined that by going ahead with the move to amend the Act, the government has also plugged a potential profit centre which had been worked out by independent power producers.
In essence, prior to the decision to move an amendment, the depreciation rate as an incentive for power producers had been pegged at a flat rate of 7.5 per cent under the Electricity Supply Act. Whereas under the Income Tax Act, depreciation was loaded up front and therefore accrued the maximum in the first five years i.e. 80 per cent of the capital investment stood to be recovered during this period.
Thereafter, the depreciation rate drops sharply and is even lower than that provided under the Electricity Supply Act. As a result, the power producer ends up claiming depreciation at levels higher than what is provided under the Income Tax Act. Consequently, the power producer, under the earlier dispensation, would have earned higher profits than the indicative 16 per cent return assured by the government for the seven fast-track power projects.
This is because the IT Act computes depreciation on a written down method. Wherein if the rate is 30 per cent and the capital cost is Rs 1 lakh, the maximum depreciation would be in the first year.
In the second year, it would be 30 per cent of Rs 70,000, and so on. In the case of a flat rate approach, the total depreciation sum is measured over the life of the capital good and then distributed evenly in each year.
However, the government has now decided to correct this anomaly and align the depreciation provisions in the Income Tax Act with the Electricity Supply Act. In the process, the loophole whereby independent power producers were raking in an extra buck, has been closed.
The matter had become a sore point with several power producers rallying with the finance ministry on the issue. The power ministry had despatched a letter in early May indicating that a speedy decision was essential.
In their communication, the power ministry had stated that in an early inter-ministerial meeting the CBDT chairman had indicated his willingness to align the depreciation rates.