The benefit may reduce the gap between average tariff and cost of power supply by about three paise per unit sold
The central government's recent decision to lower the corporate tax rate is a positive development for the power sector, as it would allow the electricity generators with cost-plus power purchase agreements (PPAs) to pass on the lower tax benefit to the distribution utilities (discoms).
As per Icra's estimates, the extent of benefit that would accrue to discoms from the power generation and transmission segments (mainly from central and state utilities), would be about Rs 2,500 crore annually.
Sabyasachi Majumdar, senior vice-president, Icra, said, "The benefit so accrued to discoms, in turn, would enable them to lower their cost of supply and hence, reduce the gap between average tariff and cost of power supply by about three paise per unit sold at all India level. However, the extent of reduction in gap for the discoms would vary across the states depending on the mix of cost-plus and bid-based PPAs and share of supply from central sector companies."
A NEW SPARK
|
- The benefit may reduce the gap between average tariff and cost of power supply by about three paise per unit sold
- The effective tax rate for most of these central sector utilities over the past two years was in the range of 21-23%
|
Within the overall annual energy generation of 1,250 billion units in fiscal 2019, about 67% is cost-plus tariff-based predominantly from central and state sector utilities. The central government entities like NTPC, NLC India, Damodar Valley Corporation, Power Grid Corporation of India and NHPC have cost-plus tariff structures, leading to pass-through of lower tax incidence to the discoms.
Also, the state-owned power generating companies and power transmission companies would be benefited from the lower tax incidence, which would be passed on to the discoms under the regulated cost-plus tariff structure. The effective tax rate for most of these central sector utilities over the past two years was in the range of 21-23%, partly due to availability of tax holiday benefit (where MAT is applicable) for a large portion of their projects.
The power generation projects, including renewable power projects having PPAs based on competitive bid based tariffs and under the erstwhile preferential tariff route are expected to benefit from the lower tax rates.
For wind or solar power project commissioned recently, Icra estimates that the reduction in tax rate will improve the internal rate of return by 40 basis points, though the impact on debt coverage metrics is not material. For projects commissioned prior to March 2017 and availing the tax holiday under Section 80-IA, it remains to be seen, if the MAT credit entitlement accumulated during the tax holiday period can be set off against the tax liability under the lower tax option in
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
 "Power sector")
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
)
){kind=small}
){kind=small}
)
)
)
)
)
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}