Union Budget 2024: Power sector poised for policy nudge; here’s what can help

A key catalyst for infrastructure development is the power sector . Recently, India transitioned from a power deficit to a power surplus country and the impetus is now on dependable, sustainable, and affordable electricity for all

Written by Sumit Singhania & Anuj Agarwal

India Inc would expect in this year’s Interim Budget enhanced allocations and tax policy directives especially for the infrastructure sector as part of directional policy announcements. A key catalyst for infrastructure development is the power sector . Recently, India transitioned from a power deficit to a power surplus country and the impetus is now on dependable, sustainable, and affordable electricity for all. Tax incentives and certainty in outcome can help attract investors and developers as the government eyes ambitious capacity targets.

Extend date on lower corporate tax

First, the existing corporate tax rate, set at 15% and currently available to new domestic manufacturing companies (including those engaged in power generation) commencing manufacturing operations by 31 March 2024, ought to be extended to a later date (say, March 2027 or even 2029). India still has a lot of untapped manufacturing potential to unleash, especially considering global supply chain disruptions and MNEs evaluating diversification in trade partners across the globe (viz. China Plus One strategy). Extending the eligibility date on lower tax rate can peg India a few notches up when investors evaluate manufacturing hubs around the world.

Clarify lower tax rate for manufacturing

As businesses become more global and diversified in their supply chains, they increasingly grow wary of carbon footprints. Green Hydrogen offers a cleaner energy substitute especially for high carbon emissive industrial applications. The government’s National Green Hydrogen Mission has set an ambitious annual production capacity of 5 MMT by 2030, and fiscal benefits by way of production-linked incentives are already notified.

On the income tax front, it will offer tax certainty and incentivize long-term investments if lower tax rate for manufacturing can be expressly clarified to be eligible for green hydrogen and hydrogen derivative businesses as well, just as it was clarified previously for business of generation of electricity.

Broad-base tax on carbon certificates

At the recent COP28, India introduced Green Credits Programme (GCP) to encourage voluntary environmental positive actions. While GCP is independent of carbon credits under the Carbon Credit Trading Scheme 2023, taxation of alternate forms of credit certificates is still unclear.

The tax law currently provides a beneficial 10% rate for taxation income arising from transfer of carbon credits which are validated by the United Nations Framework on Climate Change (UNFCC). Taxation of all other certificates such as the Renewable Energy Certificates (RECs), or Voluntary Emission Reduction (VER) certificates, remains subjective to interpretation. It is a fit case to broad-base the concessional tax rate to include income from all carbon certificates.

Alternate net basis of taxation (instead of taxation at 10% on gross basis) may be considered for qualifying businesses engaged in trading of carbon credits. This will bode well with the government’s plans to develop a carbon market in India under the recently notified Carbon Trading Scheme 2023.

Extend time threshold for infra investments

While a more serious package of fiscal and budgetary policies for the sector can be expected to be rolled out by the elected government later in the year, the Interim Budget can consider extending the time threshold for qualifying investments by sovereign wealth funds or pension funds in the infrastructure sector, due for sunset on March 31 2024. Since the initial term of tax exemption brought home an FDI of approximately US$ 6.7 bn in 2022 (up from US$ 3.7 bn in 2021) via direct investments, another term holds promise to fare just as well, if not better.

A similar tax policy move would be to reconsider making long-term debt financing attractive from a tax cost standpoint. Presently, the tax cost of debt funding ranges from 10 to 20%, subject to type of the instrument and country of source. But there is a compelling case for reintroducing a lower tax rate on select debt funding sources.

Consolidated group tax filing

Last, from an operational ease standpoint, consolidated group tax filing approach, especially for infrastructure businesses which are necessitated to have multiple project SPVs, can bring in efficiencies. Having multiple SPVs for a single line of business results into onerous compliance burden and non-fungibility in offset of tax losses. If consolidated group tax filing can be introduced – it exists in several other countries such as the US, Australia,France, etc. – it can certainly improve ease of doing business and bring in tax efficiencies at a group level.

The government has its task cut out in the run up to the budget presentation. While it gears up for the general elections a few weeks from now, a directional tax policy layout for next few years is what can reasonably be expected in the Interim Budget of February 1. The outcome of the election will determine the strength of the push for most of these policy moves when the full year Budget is presented later in the year.

Sumit is Partner and Anuj is Director, Deloitte Touche Tohmatsu India.

Written by Sumit Singhania & Anuj Agarwal

India Inc would expect in this year’s Interim Budget enhanced allocations and tax policy directives especially for the infrastructure sector as part of directional policy announcements. A key catalyst for infrastructure development is the power sector . Recently, India transitioned from a power deficit to a power surplus country and the impetus is now on dependable, sustainable, and affordable electricity for all. Tax incentives and certainty in outcome can help attract investors and developers as the government eyes ambitious capacity targets.

Extend date on lower corporate tax

First, the existing corporate tax rate, set at 15% and currently available to new domestic manufacturing companies (including those engaged in power generation) commencing manufacturing operations by 31 March 2024, ought to be extended to a later date (say, March 2027 or even 2029). India still has a lot of untapped manufacturing potential to unleash, especially considering global supply chain disruptions and MNEs evaluating diversification in trade partners across the globe (viz. China Plus One strategy). Extending the eligibility date on lower tax rate can peg India a few notches up when investors evaluate manufacturing hubs around the world.

Clarify lower tax rate for manufacturing

As businesses become more global and diversified in their supply chains, they increasingly grow wary of carbon footprints. Green Hydrogen offers a cleaner energy substitute especially for high carbon emissive industrial applications. The government’s National Green Hydrogen Mission has set an ambitious annual production capacity of 5 MMT by 2030, and fiscal benefits by way of production-linked incentives are already notified.

On the income tax front, it will offer tax certainty and incentivize long-term investments if lower tax rate for manufacturing can be expressly clarified to be eligible for green hydrogen and hydrogen derivative businesses as well, just as it was clarified previously for business of generation of electricity.

Broad-base tax on carbon certificates

At the recent COP28, India introduced Green Credits Programme (GCP) to encourage voluntary environmental positive actions. While GCP is independent of carbon credits under the Carbon Credit Trading Scheme 2023, taxation of alternate forms of credit certificates is still unclear.

The tax law currently provides a beneficial 10% rate for taxation income arising from transfer of carbon credits which are validated by the United Nations Framework on Climate Change (UNFCC). Taxation of all other certificates such as the Renewable Energy Certificates (RECs), or Voluntary Emission Reduction (VER) certificates, remains subjective to interpretation. It is a fit case to broad-base the concessional tax rate to include income from all carbon certificates.

Alternate net basis of taxation (instead of taxation at 10% on gross basis) may be considered for qualifying businesses engaged in trading of carbon credits. This will bode well with the government’s plans to develop a carbon market in India under the recently notified Carbon Trading Scheme 2023.

Extend time threshold for infra investments

While a more serious package of fiscal and budgetary policies for the sector can be expected to be rolled out by the elected government later in the year, the Interim Budget can consider extending the time threshold for qualifying investments by sovereign wealth funds or pension funds in the infrastructure sector, due for sunset on March 31 2024. Since the initial term of tax exemption brought home an FDI of approximately US$ 6.7 bn in 2022 (up from US$ 3.7 bn in 2021) via direct investments, another term holds promise to fare just as well, if not better.

A similar tax policy move would be to reconsider making long-term debt financing attractive from a tax cost standpoint. Presently, the tax cost of debt funding ranges from 10 to 20%, subject to type of the instrument and country of source. But there is a compelling case for reintroducing a lower tax rate on select debt funding sources.

Consolidated group tax filing

Last, from an operational ease standpoint, consolidated group tax filing approach, especially for infrastructure businesses which are necessitated to have multiple project SPVs, can bring in efficiencies. Having multiple SPVs for a single line of business results into onerous compliance burden and non-fungibility in offset of tax losses. If consolidated group tax filing can be introduced – it exists in several other countries such as the US, Australia,France, etc. – it can certainly improve ease of doing business and bring in tax efficiencies at a group level.

The government has its task cut out in the run up to the budget presentation. While it gears up for the general elections a few weeks from now, a directional tax policy layout for next few years is what can reasonably be expected in the Interim Budget of February 1. The outcome of the election will determine the strength of the push for most of these policy moves when the full year Budget is presented later in the year.

Sumit is Partner and Anuj is Director, Deloitte Touche Tohmatsu India.