Top government sources said that after hectic discussions between the ministries of finance and power, the former has agreed in principle that the income tax paid by a central power sector undertaking (CPSU), which is recoverable from the beneficiaries the state electricity boards (SEBs), should be exempted from the provisions of Section 195 (A) of the I-T Act.
Currently, the power purchase agreement (PPA) provides for reimbursement of income tax liability of power generating companies by the concerned beneficiaries meaning thereby that the income tax liabilities are a pass through.
However, under section 195(A) of the I-T Act, income tax recoverable from the beneficiaries the SEBs, is again treated as income of the power generating company. This has a cascading effect as the amounts that are reimbursed by the beneficiaries are again added to the income of the power generating companies.
With this anomaly, the effective rate of tax on the income of a generating company increases to 55.52 per cent from 35.7 per cent (including 2 per cent surcharge on 35 per cent rate of tax).
In view of the enhanced income tax liability, the SEBs complain of a huge income tax liability besides an increase in the per unit cost of power, which is ultimately borne by the consumers. Moreover, income tax paid by power companies remains outstanding and reduces the availability of funds generated by them from operations.
Speaking to The Financial Express, a senior power ministry official said that the SEBs not only protest against this arrangement but also withhold the payment to CPSUs, which is reflected in their outstandings. As the income is not received from the SEBs, the central utilities virtually pay a tax on income not received, he added.
Officials said that in case reimbursement of tax is not clubbed with the income of the generating companies, there would be a reduction in the tariff of about 5 paisa per unit.
As per Section 195 (A), a tax chargeable on any income is to be borne by the person by whom the income is payable, then such income shall be increased so that after deduction of tax it would be equal to the net amount payable by such person. In the power sector, rates of return on investment have been notified net of the tax payable on profits and income tax on profits of power utilities is therefore a pass through in the tariff.
The PPA entered by power sector companies with their beneficiaries provides for 16 per cent post-tax rate of return, as fixed charges. In addition to this, the beneficiaries have to bear income tax liability due to generation income. Such liability of income tax on mercantile basis when billed to beneficiaries is treated as income under the provisions of Section 195 (A) and is again added in generation income of the company which is subject to income tax.