Continuous capacity addition in the power sector is widely acknowledged as a key socio-economic growth driver for India. The Union government has time and again set various goals and targets in its policies with specific focus on capacity addition in the power sector. The 12th Five Year Plan specifically indicates the need to create 1,00,000 MW of new power capacity to cater to the country?s burgeoning energy needs. The planned capacity addition as per the 11th Five Year Plan was significantly constrained due to delays in commissioning of new units, long outages, shortage of coal/gas etc.

The achievement of power capacity addition targets would depend upon fresh investments ? something that the Indian power sector currently lacks given the recent crises plaguing the power sector. Optimisation of tax costs vis-a-vis generation capacity addition may be one of the steps that the government can undertake to lift the gloom from the investment climate in the power sector.

With the Budget 2012 countdown, the power sector eagerly awaits and expects favourable reforms that could lead to overall reduction of tax costs. From an indirect-tax standpoint, there is a palpable excitement vis-a-vis introduction of the negative list of services. The introduction of the negative list of services represents a fundamental shift in India?s approach to taxation in services (which currently taxes only certain specified services). A negative list based approach to service tax is a move towards introduction of GST with the aim of enhancing the present service tax base to increase revenue generation.

In the above context, it is pertinent to understand that since the output of a power plant ie, electricity is not leviable to central or state indirect taxes all input side indirect taxes stack up and add to the project cost. To illustrate, there are several input services that are procured by a power project developer for setting up, construction, operation and maintenance of a power project on which service tax is paid. However, there is no possibility of claiming credit of such input service tax since there are no output taxes and the same becomes a cost. The situation may not change even in a GST scenario since at this stage electricity duty is not proposed to be subsumed within GST. Given that services represent a significant portion of the cost of setting up as well as operation and maintenance of a power project, inclusion of services for setting up of a power project as well as operation and maintenance of a power project in the proposed negative list of services may provide significant relief to the power developers.

In this regard it is pertinent to note that the ?Revised Concept Paper on the Negative List of Services? has specifically listed ?construction, works-contract, repair, alteration, renovation or restoration of specified infrastructure for larger public good? in the negative list with the comment that what qualifies as a ?specified infrastructure for larger public good? would be notified later. Notifying power projects under the same would go a long way in optimising tax costs for power project developers and would be a step towards improving the investment climate in this sector.

In the past, the government has provided exemptions from customs and excise duties to certain power projects. However, to keep pace with widening deficit in power supply, continued efforts are required from the government through increased budgetary support. Further, given that competing economies like China has surged several times ahead of India in power generation capacity addition, the Indian power sector is in grave need of Government support. While inclusion of services for setting up of a power project as well as operation and maintenance of a power project in the proposed negative list of services may not be the panacea for the various problems plaguing the Indian power sector currently, it would definitely be a significant step in that direction.

(The author is partner and leader, indirect tax, BMR Advisors. The views expressed are personal. With inputs from Sudipta Bhattacharjee, manager)