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  • Service: Tax
  • Type: Regulatory update
  • Date: 9/24/2014

India 

Taxes and Incentives
India Taxes and incentives for renewable energy KPMG Global Energy & Natural Resources.

Support schemes

Investment and other subsidies


Foreign Direct Investment (‘FDI’)


The growth of the clean energy sector in India has been impressive. India permits FDI up to 100 percent in the sector under the automatic route in Renewable Energy Generation and Distribution projects that are subject to the provisions of the Electricity Act of 2003. Under the Act, no prior approval of regulatory authorities is required.


Giving a boost to infrastructure sectors, Reserve Bank of India (‘RBI’) has relaxed the External Commercial Borrowings (‘ECB’) norms. Earlier, ECB was allowed to be raised for investment in infrastructure sector which included power. Now, the RBI has expanded the definition of infrastructure to cover sector such as Energy which in turn covers sub-sectors such as Electricity generation/transmission/distribution, Oil pipelines, Oil/Gas/Liquefied Natural Gas (LNG) storage facilities, Gas Pipelines (includes city gas distribution network).


With a view to strengthen the flow of resources to infrastructure sector, RBI has also now permitted raising ECB for project use in SPVs in the infrastructure sector under the automatic route/approval route, as the case may be.


Tax holiday under the domestic income tax law


Undertakings engaged in the generation and/or distribution of power has been offered a 10-year tax holiday for renewable energy plants if power generation begins before 31 March 2014. This date has not been extended as there was a vote on account budget. Post forming of new Government, the budget may either extend the tax holiday or may not extend the same (which is unlikely). However, the plants have to pay a minimum alternative tax at the rate of approximately 20 to 21 percent (based on the income), which can be offset in future years (10 years).


Recently, the Finance Minister has released the Direct Taxes Code, 2013 (DTC 2013) for public discussion/comments. However, next development in DTC depends on the policies and priorities of the next government. The draft provisions of the Direct Taxes Code provide for alternative mechanisms for providing tax incentives to power companies. As regards this incentive, almost all revenue and capital expenditures will be allowed as a tax deduction upfront instead of claiming amortization/depreciation on the capital expenditure. In addition, there would be no tax holiday.

Financing


The Indian Renewable Energy Development Agency has been established under the Ministry for Non-Conventional Energy Sources as a specialized financing agency to promote and finance renewable energy projects.

Operating subsidies

Feed-in tariff


Generation Based Incentives (GBI)


To attract foreign investors, the government has taken several initiatives such as introducing GBI schemes to promote projects under Independent Power Producers (IPP) mode for wind and solar power. Accelerated depreciation


Under the domestic income-tax law, companies involved in renewable energy such as solar and wind was provided with accelerated depreciation at 80 percent. However, the government has restricted the accelerated depreciation of 80 percent to windmills installed on or before 31 March 2012. Windmills installed after 31 March 2012 will be eligible for depreciation of 15 percent instead of 80 percent on the written-down value method.


It may be noted that 80 percent depreciation is still available for solar power projects.

Further, power companies have been provided with an option to claim depreciation under straight line method. However, a company can claim either accelerated depreciation or GBI (but not both).


Quota obligations

Renewable Purchase Obligation (RPO)


The National Action Plan on Climate Change (NAPCC) has recommended renewable purchase obligation (RPO) target of 10 per cent by 2015 and 15 per cent by 2020 at the national level.


Several measures such as RPO and REC (Renewable Energy Certificate) have been created to promote renewable energy. Under RPO rules, distribution companies, open access consumers and captive consumers are obligated to buy a certain percentage of their power from renewable sources of energy.


To meet RPO targets, REC market has been introduced and RECs started trading in Feb 2011. However, REC mechanism has not adequately picked up yet and steps are being considered to review the market. We believe that going forward, enforcement of RPO will create the volumes needed for the REC market.

Additional information

Jawaharlal Nehru National Solar Mission (JNNSM)


The objective of JNNSM, which was launched in 2010, is to establish India as a global leader in solar energy and to deploy 20,000 MW of solar power capacity by 2022. JNNSM targets to achieve this in three phases: Phase 1 (up to early 2013), Phase 2 (2013-17) and Phase 3 (2017-22).


In the Phase 2 – Batch 1, Solar Energy Corporation of India (SECI) auctioned total 750 MW of solar projects divided in two categories - open and domestic with 375 MW in each. This had a strong interest with bids from 58 developers for 2,170 MW as against 750 MW capacity on offer.


Besides the national program, solar programs at the state level are also driving solar growth in the country.


Renewable Energy in India


India’s grid-connected renewable energy capacity has reached 31.7 GW by the end of March 2014 with Wind energy at 21.1 GW and solar energy at 2.6 GW. The Ministry of New & Renewable Energy (MNRE) has prepared an action plan to take solar energy installations to 10 GW by 2017 and add total 30 GW of renewable energy to its energy mix by 2017.

Carbon Credits and Clean Development Mechanisms (CDMs)


The Clean Development Mechanism (CDM) is an arrangement under the Kyoto Protocol. The mechanism allows developed (Annex 1) countries with a green house gas (GHG) reduction commitment to invest in projects that reduce emissions in developing countries as an alternative to more expensive emission reductions in their own countries. The developed country gets carbon credits, while the developing country gets capital and clean technology.


India is the second largest seller of carbon credits. The country is also a leading destination among non-Annex 1 countries with regards to CDM implementation. It has the highest rating of any CDM host country, with 32 percent of the world total of 1,081 projects registered with CDM EB.


Tax and fiscal incentives


Tax cost forms a substantial part of Engineering Procurement and Construction (EPC) project costs, which can range from 10 percent to 20 percent of the total renewable energy project cost. Considering the special focus on renewable energy, the Central Government has given various incentives on setting up the renewable energy power project which includes exemption from customs and excise duties on specific goods required for setting up the renewable energy projects.


However, these exemptions are subject to the fulfilment of prescribed conditions and compliances to be undertaken by the EPC contractor or IPP.


Furthermore, some of the state governments have provided the incentives in the form of a VAT at a reduced rate (5 percent) whereas the other states levy a VAT of 15 percent. Given the vast variety of tax and fiscal incentives available, one needs to quantify the tax cost and explore the structuring options before investing in the solar sector.


Tax planning


For investors based overseas, an entry strategy for India is highly important. To achieve tax efficiency with regard to taxability of gains on sale of shares, many companies opt to route the investments through an intermediate entity in a tax-friendly jurisdiction.


Typically, renewable energy companies in India procure equipment and services from overseas. In this scenario, contract structuring from a tax perspective helps renewable energy companies to achieve major tax efficiency upfront. In the case of multiple parties coming together and bidding as a consortium, contract structuring is critical to avoid the risk of the consortium being taxed as an Association of Persons.


In India, based on the nature of operation, different forms of entity can be established. Operating through a limited liability company by forming a joint venture/wholly owned subsidiary could be one of the possible options where the foreign company is looking at a long-term presence in India. However, one needs to rule out other relationships and entities before proceeding with these options.


In addition, the renewable energy sector is capital intensive, so investing companies need to carefully explore the options available for funding their projects and repatriating profits in a tax-efficient manner.


EPC contracts


The taxation of EPC contracts offers various challenges and opportunities. The EPC contract can be structured as a single contract or as divisible contracts. The selection of either option can cause a huge impact on the tax costs and working capital of the project.


The selection of schemes for the payment of indirect tax liabilities on renewable energy power plant construction offers various tax planning avenues for renewable energy power projects. Furthermore, any scheme can involve difficulties in compliance, such as a restriction on procurement of goods outside the state.


The procurement of goods and supply chain structuring play a vital role in the solar power project costs, since the tax rates are different for procurement of goods from outside India, from other states or from the same state.


Generally, the EPC contractor also undertakes the operation and maintenance of the power plant. The taxability of an Operation and Management (O&M) contract has been the subject of disputes in various decisions.


The exemption provided under the Customs and Excise Act is subject to various conditions and compliances. Hence, it is very important to ensure the compliance of the respective conditions as otherwise the benefits envisaged may not be available.


The proposed introduction of the Goods and Services Tax will also play a major role in the costing of a renewable energy power project.


Given the vast variety of tax and fiscal incentives available, one needs to quantify the tax cost and explore the structuring options, before planning the capex, at the tender/bid stage and also at the time of awarding contracts, so that tax costs are optimized.

 

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