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High on expectations

EM NEWS BUREAU ,  Monday, April 09, 2012, 17:36 Hrs  [IST]

Cover storyThe power sector, despite being on a growth path with significant investment envisaged, has been a victim of lacunae and anomalies in policy framework. Every year, hopes are pinned on the Union Budget and expectations of remedial measures soar high. This special story attempts to provide an overview of expectations from the Union Budget: 2012 that is scheduled to be presented on March 15, 2012. This story, based on views collected from industry associations, companies and even think-tanks, covers a wide spectrum of the power and electrical equipment industry.

A large body of the Budget expectations revolved around rationalization of indirect taxes like excise duty, customs duty, SAD, etc. Be it electrical equipment or electronics industry, India is witnessing substantial growth in imports of finished products. This is hurting the domestic manufacturers. Industry associations like IEEMA and ELCINA are looking forward to making imports of finished equipments costlier through imposition of appropriate duties. Besides, companies are keenly awaiting the introduction of GST(Goods & Services Tax) that is scheduled for April 2012.

SERVICE TAX EXEMPTIONS
Amongst the major recommendations by apex industry body IEEMA has been the issue of service tax on power projects. The apex organisation has appealed to the government for extending service tax exemption to all power projects, including power generation, transmission and distribution projects in line with other infrastructure projects like roads, airports, ports, railways, transport terminals, etc.

According to Ramesh Chandak, President, IEEMA, the domestic electrical equipment manufacturing industry suffers a substantial cost disadvantage of 14 per cent vis-à-vis imports while supplying to power projects due to many local taxes such as VAT, entry tax/Octroi; higher financing cost; NIL or low customs duty project imports; lack of quality infrastructure; dependence on foreign sources for critical raw material and components, etc.

IEEMA also feels that as per the recommendations of the Arun Maira Committee, the government should provide a level playing field to domestic manufacturers by making having a duty structure as 10 per cent customs duty, nil CVD and 4 per cent SAD on all categories of power projects. Simultaneously, deemed export benefits in the form of excise duty exemption and refund be provided to the domestic suppliers.

CRGO Steel

CRGO SteelIEEMA, in its pre-Budget memoranda submitted to the government of India, has recommended that imports of cold rolled grain oriented (CRGO) electrical steel should be allowed at nil duty. Currently, CRGO still attracts basic customs duty although the special additional duty (SAD) has been removed. IEEMA feels that imports should be allowed at nil duty at least till India starts producing CRGO domestically.

CRGO is a critical input used in the making of power and distribution transformers. India currently consumes around 2 lakh tonnes of CRGO per year, and this is expected to rise in the coming years in keeping with higher demand for transformers. For the entire XII Plan (2012-17), domestic consumption of CRGO steel is expected to be 11.5 lakh tonnes, likely to rise to 13.5 lakh tonnes in the XIII Plan period (2017-22).

CRGO has been amongst the most interesting and even controversial subject of India's power equipment industry. India has never been able to produce CRGO locally. Hence, the dependence on imports is inevitable. What has been a worrisome feature of the industry is the rampant dumping of uncertified CRGO that is more often than not of substandard (non-prime) grade. There is no way for Indian importers to know the quality of the CRGO imported, resulting in inadvertent usage of scrap CRGO.

Over the past two years or so, there have been some local developments that could have a positive bearing on the CRGO equation in India:

Quality Control Order: In June 2011, the government promulgated an order that required all CRGO steel used in India to bear BIS certification. This move is expected to put a check on the usage of substandard CRGO in India. Some international suppliers have already started complying with these guidelines and have started imprinting BIS certification on their CRGO steel meant for Indian consumption. Transformer manufacturers are very hopeful of the quality control order bringing some relief to the anarchies prevailing in CRGO trade.

B. Lal, Secretary-General, ITMA, noted, "For the transformer sector, checking the quality of imported steel is important. We are awaiting the gazette-notification of the steel ministry's order of June 24, 2011. Once it is done, all manufacturers of steel and steel products shall make an application to the Bureau of Indian Standards for obtaining license for use of the standard mark. This will also include the foreign producers."

BEE certification: With a view to ensuring that only efficient distribution transformers are pressed into service, Bureau of Energy Efficiency (BEE) has made it mandatory for distribution transformers to have a minimum of 1-star rating. This move is expected to encourage transformers manufacturers to use prime grade CRGO. Manufacturers in the unorganized sector that are known to willfully use cheap CRGO with a view to cutting costs, might now be encouraged to go in for quality material, analysts feel.

Domestic production: Public sector entities Steel Authority of India, Bharat Heavy Electricals and Rashtriya Ispat Nigam last year decided to set up a joint venture to manufacture special-grade steel including CRGO and CRNGO steel. To be set up with an investment of Rs.3,000 crore, this is expected to be India's first unit for production of CRGO and CRNGO steel. The three companies are believed to be in talks with global suppliers of this technology.


IEEMA also pointed out that all imports are exempted from levy of CST/VAT, while all domestic supplies attract CST at 2 per cent and VAT from 5 per cent to 14.5 per cent. Although, the state governments were advised to exempt supplies to mega power projects from sales tax and other local levies and not to consider such levies for evaluation of bids; yet many states are not accepting this de-loading principle and evaluate bids taking these levies into account nor any exemption is provided by any of the states from such levies. IEEMA has recommended that either there should be mandatory exemption of CST/VAT for mega / ultra mega power projects or these levies should be excluded for the purpose of bid evaluation.

PRICE VARIATION FORMULA
IEEMA has observed that domestic suppliers suffer huge financial burden due to demand of interest on differential excise duty in cases where there is determination of cost of raw materials on the basis of a price variation formula.

Power distributionIn these supplies, an agreed contractual price is charged and appropriate excise duty is paid on the day of clearance. However, there is a delay in publishing of applicable indices, for reasons beyond the control of the suppliers. As soon as the indices are known, a supplementary invoice is raised by the suppliers and differential excise duty is promptly deposited. However, the excise authorities treat this as delayed payment.

IEEMA has suggested that an amendment in Sub-Rule 4 of Rule 7 of Central Excise Rules 2002 is required for replacing the wordings 'the month for which the duty is determined' by 'the month in which the duty is determined' in order to remove applicability of interest in these cases.

Regarding excise duty exemptions, IEEMA has observed that there is no excise duty exemption on steel and cement supplied to mega power projects (including UMPP) as the corresponding exemption notification of customs duty has been made applicable only to tariff heading 9801 (Chapter 98). IEEMA has suggested that this anomaly be removed and the customs notification be extended to "any chapter."

TAX HOLIDAY
The power sector historically is entitled to tax holidays under section 80-IA of the Income Tax Act, observed Amol Kotwal, Deputy Director, Energy & Power Systems Practice, Frost & Sullivan - South Asia, Middle East and North Africa. Over the past 2-3 years, the tax holiday is being extended on a year-onyear basis. Currently, the tax holiday is applicable for new power generation, transmission and distribution projects being operational before 31-Mar-2012, Kotwal said.

On his expectations on this count, Kotwal felt that tax holiday should be for a defined period and extended for a longer duration (approximately for 15-20 years), thereby providing clarity to project developers in terms of time period up to when the tax exemptions would be available, which will facilitate their investment decision making. Simultaneously, ultra mega power projects and other mega power plants are likely to turn operational during the 2013-2016 period. Tax holiday should hence be extended, he proposed.

POLICY & REFORMS
Focus should shift on T&D: While discussing the power sector, the focus has invariably been on the generation side. All along, the debate has been about India not been able to meet the power generation capacity addition targets during the X and XI Plan periods. Issues discussed have either been of India's inability to construct power plants on time or the difficulties around sourcing coal for operational plants. "The more serious problem is one of under-investment in the T&D sector," noted Ramesh D. Chandak, MD & CEO, KEC International Ltd. He noted that the Indian power sector was in a state of crisis and that it is not only a sectoral challenge but a subject of national concern. Regarding the financial morass of the power distribution sector, Chandak observed that the Shunglu Committee has said that losses of distribution utilities are in the order of Rs.1 trillion. Banks, being the major lending agencies, will also eventually face challenges on this count. The Union Budget therefore must emphasize on accelerating investment in the power T&D sector, Chandak felt.

Insulators

Electronics equipmentInsulator manufacturers are hopeful that the Union Budget 2012 will increase import duty with a view to curbing imports from China. According to estimates, Chinese suppliers currently enjoy a 22 per cent price benefit over Indian counterparts. This differential comes from a variety of factors including low import duty of 7.5 per cent and also a host of concessions offered by the Chinese government. Over the past four years, China has been able to capture a 20 per cent market share of the Indian insulator market, reliable reports suggest. Central transmission utility Power Grid Corporation of India Ltd has an investment outlay of Rs.1 trillion for the XII Plan period (2012-17) and a fairly significant part of this will be towards procurement of insulators. PGCIL has already started placing orders on Chinese insulator manufacturers, and so have state power transmission utilities. Sichuan Yibin Global Group is amongst the several Chinese companies catering to India.

In its Budget 2012 wish list, IEEMA has also cited insulators as being an instance of inverted duty where the customs duty on raw material is higher than or equal to that of the finished products. IEEMA has recommended lowering of the duty on the raw materials and intermediaries in order to remove these duty anomalies.


The power T&D sector needs significantly higher capital investment in both-systems and hardware, the KEC top official felt. Transmission lines in India are loaded up to 90 per cent in India against the world standard of 60-65 per cent. This is creating over-loading and is reflective of underinvestment in new infrastructure. For the last 50 years, India has been able to investment barely half of the desired level of investment in the T&D sector.

Argentina, Chile and Peru are some countries that made commendable progress over the past 7-8 years in building power transmission infrastructure. Discussing the challenges, Chandak said that securing right-of-way is a big hurdle and the associated time overruns are resulting in escalation in cost of project execution.

Power equipment: The Indian electrical equipment industry was steadily growing at 13-14 per cent annually, Chandak noted, adding that now the overall growth is barely 4.4 per cent. Imports of electrical equipment, growing at 20 per cent in the recent past, have eroded the domestic equipment market. In his pre-Budget note, Chandak expected the government to consider either a strategy for price preference or levying a customs (or additional) duty to protect equipment in the power generation as well as T&D sector.

Electrical equipmentHe also said that the Budget should consider increasing from 15 per cent to 30 per cent the progress rate of construction equipment used in the power T&D sector as they get outdated very fast from working in open areas. Chandak also made a case for special exemptions for the T&D contracting industry that has to execute works in difficult terrain and geographical conditions like in Jammu & Kashmir, northeast India and in overseas locations like Afghanistan.

Concurring with the view on imported equipment was B. Lal, Secretary-General, Indian Transformer Manufacturers' Association who felt that the tax structure for imported electrical equipment should be designed in such a way that it creates a level playing field for the Indian manufacturers.

Reforms-oriented Budget: The government should present a reform-oriented budget to help the economy gather growth momentum, said P.P. Gupta, Managing Director, Techno Electric & Engineering Co Ltd. Explaining his stand, he said that the Union Budget: 2012 is coming at a time when the country is in the midst of an economic downturn. Government finances remain crippled and an inflated subsidy bill would continue to pose a challenge. Obstructions in the form of delays in approval and decision making had stalled many new projects in the year gone by. For a sustainable and healthy growth, the country requires an equivalent investment in the infrastructure arena. Gupta outlined some of his expectations as:
  • Settling the issue of financially and politically bankrupt state-owned distribution companies
  • Reduction in Minimum Alternate Tax (MAT) rate
  • Relaxation on applicability of MAT, dividend distribution tax and capital gains for unlisted special purpose vehicles formed for infrastructure and power projects
  • Extension of eligibility norms of tax holiday incentives for power generation companies to another couple of years u/s 80IA of the Income Tax Act
  • Concrete steps towards creation of a deep and robust debt capital market to make available long term debt instruments for infrastructure
  • Permit banks to issue long-term tax-saving infrastructure bonds and enhance participation of banks, financial institutions and large NBFCs in infrastructure financing
Fiscal health of SEBs: Financial health of most of the State Electricity Boards (SEBs) in the country is in bad shape due to various reasons such as high technical losses, low power tariffs etc, said Girish Shirodkar, Global Partner & MD, Strategic Decisions Group India & Asia Pacific. State electricity boards are primary purchasers of power production but because of the bad financial health, most the SEBs are unable to clear their dues and the losses and debt are mounting necessitating bail outs by government. Power tariffs in the country are at very low levels, due to lack of periodic revisions, and with increasing cost of production due to increase in cost of coal, the situation is getting worse. Based on CRISIL estimates, power distribution companies needed to raise tariffs by 47 per cent just to break even in 2011-12, said Shirodkar. He summarized his set of solutions to address the poor fiscal health of state power utilities:
  • Periodic revisions of power tariff linked to inflation and cost of coal (fuel cost constitutes around 70 to 80 per cent of the total operating cost
  • Periodic revision of tariff - Currently, SEBs have to file a petition for hike in power tariff and many SEBs do not do this regularly. So a periodic inflation linked hike in power tariff is required
  • Improvement in efficiency of SEBs through greater performance controls. T&D losses for SEBs is very high as compared to private operators
  • Privatisation of discoms with a target for efficiency improvement and regulations for viable tariffs
  • Ensure proper implementation of the open access policy to large customers (>1 mw)
Ease of finance: Improving the flow of funds for the power sector was a key Budget expectation for Anil Sardana, Managing Director, Tata Power Company Ltd. He noted that despite the country witnessing power capacity addition of 50 GW in the XI Plan period, urgent policy initiatives were needed to address key issues that were hindering the growth of the sector. Sardana hoped that the ensuing Budget would attempt to improve the flow of funds to the power sector by revising sectoral lending limits of banks. Other measures to this effect could be including the power sector in any takeout financing scheme floated by the government, or relaxation in external commercial borrowing guidelines for refinance of power projects. This could be achieved by increasing the rupee component of debt or raising the quantum of ECB funds for automatic approval. "We urge the government to usher in distribution reforms and include electricity under the purview of GST," concluded Sardana.

Temporary power: The irregularity in the local coal supply coupled with the rising costs of imported coal is directly affecting the supply of reliable energy to commercial and domestic power consumers across the country. Consequently, access to stable and consistent power has become a major issue for Indian industry, according to Debajit Das, Managing Director, Aggreko Asia.

Das further noted, "Utilisation of fast-track interim power solutions are an excellent way for industries across all sectors to ensure their businesses stay up and running during the power crisis. The current restrictions on the import of used power generating sets, the category in which rental generators are classified, is the single largest constraint in setting up temporary power plants in India. To ensure temporary power solutions are readily available to Indian industry, foreign trade policies should be addressed to better facilitate the temporary import of used power generating sets without payments of custom duties and license restrictions on re-exports. Additionally, reforms in storage regulations for diesel and LNG will also assist industries to quickly set up temporary power facilities."

Type-testing: Across the industry, it is an accepted fact that India's capabilities in the power equipment sector must grow substantially. Today there is acute dependency on imports for critical components and material. Rajesh V. Shah, CMD, High-Volt Electricals Pvt Ltd, feels that the electrical industry is fully capable of meeting the challenges in store. However, there are some weak links the chain. India is found lacking in type-testing, research after type-testing and also implementation of quality standards. Shah attributes the situation to lack of type-testing facilities in the country. The Union Budget should place emphasis on this aspect and help the country grow its typetesting infrastructure must grow at least four times. Over the next two years or so, the country must be equipped to perform type-testing on any product manufactured by the electrical industry, Shah felt. Secondly, results of typetesting done by manufacturers are not available to the public. Due to this, valuable knowledge cannot be shared. Agencies CPRI and ERDA should independently take up this task for which funds should be allocated in the Union Budget, expressed Shah.

RENEWABLE ENERGY
Given the ongoing thrust on solar power projects, thanks to the National Solar Mission, there have been expectations from solar energy players. According to K. Subramanya, CEO, Tata BP Solar, the Budget could look at endorsing domestic content and also take steps in correcting anomalies in duties and taxes.

Subramanya noted that domestic content was mandated in Phase-I of the National Solar Mission for crystalline silicon (c-Si) only. This created a loophole that was massively exploited, skewing the ratio of thin film (100 per cent imported) to c-Si in India. This resulted in a virtual shutdown of Indian solar manufacturing facilities. The Budget could therefore consider imposition of differential tariff for projects using domestic content.

Railway Budget is equally important

Railway budgetIn an exclusive interaction with Electrical Monitor, Rajesh V. Shah, CMD, High-Volt Electricals Pvt Ltd observed that the Railway Budget is as important as the Union Budget. The railways, thanks to its electrification works is an important business driver to the electrical equipment and T&D contracting space. Shah feels that the contribution of the domestic electrical equipment industry to the Railways is currently very low. He is confident that with some modification, products made by the domestic industry can be adapted for traction as well as other railway applications. However, this has generally not been encouraged by the Railways. One of the reasons is that the technology gap between foreign countries and India is still very high. This gap can be bridged, Shah avers, citing the example of China that has made rapid strides in its trains. Nowhere on the technology map till ten years ago, China today is planning as many as 40 super-fast trains clocking speeds of over 200 kmph.

Shah observes three principal shortcomings—lack of technology transfer from overseas railway; insufficient R&D in India; and the limited role played by Railway Standards & Design Organisation (RSDO) in analysis of technical problems.

The Railway Budget could do well in providing sufficient funds for transfer of technology (TOT) and for R&D works. This will enable products to suit Indian conditions. Shah cited the example of products bought from Europe that were tested there, and were found not providing the same level of service in Indian conditions. In the past, as Shah recalls, there was a TOT done with a multinational for three-phase locomotives but due to high costs involved (and due to insufficient budgets), these locomotives have not yet stabilized for Indian conditions.

Shah also suggests that the Indian Railways should form a new department exclusively for technology and system upgradation that would also engage in field trials and execution. He is also confident that RSDO can become a world-class facility if more funds and autonomy are provided for the organisation to have an independent test laboratory and for carrying out experiments independently.


The Tata BP Solar top official observed that both solar cells and modules are exempt from import duty and excise duty, resulting in overflow of input credit as some of the inputs attract duties. It is therefore, requested that the anomaly of the inverted duty structure is addressed to make local manufacturing to have equitable treatment with imports

Subramanya also proposed that the VAT and sales tax on the manufacture of solar cells and modules be made NIL to give the domestic solar photovoltaic manufacturing companies an equitable treatment.

Power distributionSolar equipment: Amol Kotwal, Deputy Director, Energy & Power Systems Practice, Frost & Sullivan - South Asia, Middle East and North Africa, pressed for sops for encouraging local manufacture solar photovoltaic systems. Kotwal observed that currently there were no specific incentives from the Union government to promote manufacturing of solar photovoltaic balance of system (BoS) equipment like inverters, charge controllers, etc. The National Solar Mission can potentially result in a huge demand for BoS. Kotwal thus expected this year's Budget to offer incentives (tax concessions, investment incentives, etc) to promote the setting up of manufacturing facilities in India.

Anomaly in duty structure: K. Subramanya, CEO, Tata BP Solar, also observed that both solar cells and modules are exempt from import duty and excise duty resulting in overflow of input credit as some of the inputs attract duties. It is, therefore, requested that the anomaly of the inverted duty structure be addressed to make local manufacturing to have equitable treatment with imports. In addition, the domestic solar PV industry is also subject to payment of VAT and sales tax, which is not applicable for import of cells and modules. Subramanya thus recommends that the VAT and sales tax on the manufacture of solar cells and modules be made NIL to give domestic solar PV manufacturing companies an equitable treatment.
 
                 
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