The corporate tax cut is a positive development for power sector as it will result in an estimated annual savings of ₹2,500 crore for the power distribution segment, rating agency ICRA said on Monday (September 30).
The government on September 20 slashed the income tax rate for companies by almost 10 percentage points to 25.17 per cent and offered a lower rate to 17.01 per cent for new manufacturing firms to boost economic growth rate from a six-year low by incentivising investments to help create jobs.
“The recent announcement by the Government…is a positive development for the power sector, as it would allow power generators with cost plus power purchase agreements (PPAs) to pass on the lower tax benefit to power distribution utilities (discoms),” ICRA said in a statement.
As per ICRAs estimates, the extent of benefit that would accrue to discoms from power generation and transmission segments (mainly from central and state utilities), would be about ₹25 billion (Rs 2500 crore) annually.
“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 3 paise per unit sold at all India level. However, the extent of reduction in gap for discoms would vary across states depending on the mix of cost plus and bid-based PPAs and share of supply from central sector companies,” said Sabyasachi Majumdar, Senior Vice President & Group Head – Corporate ratings, ICRA.
Within the overall annual energy generation of 1250 billion units (1 unit =1 kwh) in FY2019, about 67 per cent is cost-plus tariff based predominantly from central and state sector utilities. 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 discoms, it said.
Also, state-owned power generating companies and power transmission companies, would be benefited from the lower tax incidence, which would be passed on to discoms under the regulated cost-plus tariff structure, it added. The effective tax rate for most of these central sector utilities over the past two years was in the range of 21-23 per cent, 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 a wind or solar power project commissioned recently, the ICRA estimates the reduction in tax rate will improve the internal rate of return by 40 basis points (bps), 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 future, it added.