Union Budget 2012: What to expect for power sector

By Hemal Zobalia, Partner-Tax, KPMG

Amidst other commercial challenges such as coal crisis, forex fluctuation etc, the termination of tax holiday available to power projects on 31st March 2012 would act as a big set-back.  Further, the new Direct Tax Code proposes to substitute the current 10 year profit based tax holiday with new investment based tax incentive which will adversely impact the returns (IRR) from the project. 

In order to support growth in power sector, this Budget should consider extending the current tax holiday regime. To address the issue of indigenous coal scarcity, customs duty of 5% on import of coal should be exempted.

Most countries like US, China, Brazil, Spain etc promote renewable energy through tax incentives. The current accelerated depreciation incentive for renewables loses its shine due to non-availability of generation based incentives and proposed investment based tax incentive. 

Government should consider providing additional incentives such as low interest loans, tax exemption on sale of carbon credits etc. Considering India