Major concessions are in the offing for hydro power sector

Hydro power sector in India is plagued by numerous problems like problems relating to land acquisition; environment, forest and wildlife clearances; R&R issues and law and order problems and variety of local issues. “Hydro Power has its own set of risks and disadvantages – Prolonged gestation periods, High cost of construction, Environmental issues, Geological Risks, Political Risks, Rehabilitation & Resettlement costs, Infrastructural development costs, Government Policies etc.” says R.P Singh, CMD, SJVN Ltd. According to CEA about 25,000 MW hydro projects have been concurred by CEA and are held up due to various reasons. However, it is heartening to note that the government, at last, seems to have realized the gravity of the situation and is planning to take measures which may attract investment and speed up the execution of the existing projects. Hydro power sector received a major setback last year when the government withdrew mega power policy which resulted in higher cost of construction for hydro power projects.

Though the Task Force on Hydro Project Development had recommended the restoration of these benefits, the government is not too keen on reversing its policy decision within a year. Instead it is mulling grant of fiscal incentives in terms of excise duty and service tax exemptions to hydro project developers. Incentive may be in the form of exemption from excise duty to all the capital goods required for the setting-up of a hydro power project irrespective of whether it is a mega power project or not. It may be remembered that at present hydro power projects attract total customs duty of 23.08% on the cost of imported gear while the equipment manufactured by domestic companies attract similar percentage of excise duty. Incidentally this, i.e., proposed reduction in duty, will also result in lower CST and VAT levied as CST/ VAT is levied on the gross value including the excise duty.

In addition to this, a suggestion has also been made to provide exemption from excise duties on cement and steel required for the civil construction work undertaken during the construction of a hydro power project. Further the government is considering a proposal to provide exemption from service tax to all services received and used during the construction, erection and commissioning of a hydro power project. At present services provided during the construction of hydro projects attract service tax @ 12.36%. The impact on account of Excise Duty and Service Tax on the overall cost of 10897 MW of hydro power generation capacity proposed to be added during the 12th Plan will be to the extent of Rs.5231 crores.

However, a section in the Power Ministry is skeptical about the entire proposal as it feels that considering poor fiscal health of the economy which is marked by the widening current account deficit and increasing fiscal deficit fresh tax exemption proposals may not find favour with the Finance Ministry. At the same time it is also argued that as most of the equipment are procured from the domestic manufacturers, customs duty exemption may not have any adverse impact on the current account deficit. However, the moot point is whether the Finance Ministry will take such drastic steps in the middle of the fiscal year? In other words, these incentives may not fructify before the next budget which will be only after next General Elections. And that may happen only if it is there in the priority list of the new government.

There is no doubt that hydro power sector has lost its sheen over the years as is evident from declining share of hydro power in the energy sector which has gone down from 43.50% in 1969-70 to 17.55% as on 30th June, 2013. According to the Power Minister, Jyotiraditya Scindia the main reasons for this downward trend is slower pace of growth of hydro projects i.e. development cycle of hydro is 8-12 years vis-à-vis 4-5 years for thermal. Indian private sector is disillusioned with the hydro power sector due to various reasons mentioned earlier. As of now, 136 Nos. of hydro projects with a combined capacity of 40991.5 MW have been allotted to private developers by state governments which are yet to be taken up for construction. Tax concessions alone may not help to tide over the situation and the government may have to take many more steps to lure more players into the sector.