Tax sops for power cos but structural issues left unaddressed

The removal in customs duty will certainly provide relief given that imported coal is at least 50% costlier than what Coal India Ltd provides locally

At first glance, the budget seems to have a lot of sops for the beleaguered power sector. Three measures stood out. One, the customs duty on thermal coal has been removed. Second, the withholding tax on foreign investments in this sector has been reduced to 5% from 20%. Thirdly, the finance minister has agreed for additional depreciation for the power sector and also extended the sunset clause (which grants tax exemptions to companies which start operations within a certain date) by a year to 1 April 2013.

The removal in customs duty will certainly provide relief given that imported coal is at least 50% costlier than what Coal India Ltd provides locally. But the finance minister has been silent on structural issues surrounding the supply of coal. There were no concrete measures announced on issues such as environment and mining – reasons which Coal India forwards for a near stagnant output.

The proposal to allow power firms to use external commercial borrowings to refinance debt is welcome. But will that and the reduction in the withholding tax really draw in foreign investments in a sector where power producers are trying stay afloat? Again, while the sunset clause is welcome and should boost capacity installations, remember that many power producers – such as NHPC Ltd - are facing problems of land acquisitions and so on.

So while we do have to wait for the Budget documents to get more details, it seems there has been no attempt made to address the structural problems of the sector as well as address reforms on electricity distribution (remember, state electricity boards have debt of at least Rs 75,000 crore). That’s perhaps why the BSE Power Index has underperformed the broader markets so far today.