Tax holiday to Power sector undertakings
Current Situation: Under the existing provisions of the Income-tax Act, 1961 (the Act), profit based deduction is available to undertaking set up for (Power sector undertaking)
- Generation or generation and distribution of power, if it begins to generate power before March 31, 2011
- Reconstruction or revival of a power generating plant, if it begins to generate or transmit or distribute power before March 31, 2011.
DTC Proposals: DTC has proposed to bring a paradigm shift in granting tax incentives to undertakings engaged in business of generation, transmission or distribution of power. The new scheme has proposed to substitute the profit-linked incentives prevalent under the existing provisions of the Act with the expenditure / investment based deductions. Further, it has provided for grandfathering of tax holiday available to power units for the unexpired period.
Undertakings eligible for profit based deduction in Assessment Year 201 2-13
- Undertakings eligible for profit linked incentives under the Act for the assessment year beginning on April 1, 2012 would be grandfathered under DTC
- While computing deduction, capital expenditure as well as expenditure incurred prior to commencement of business shall not be allowed
- Conditions specified under section 80IA for availing Tax Holiday shall continue to be applicable.
Undertaking set up in the DTC regime
- Profits shall be gross earning as reduced by business expenditure in accordance with Schedule XIII of DTC
- Capital expenditure and expenditure incurred prior to commencement of business shall be allowable as business expenditure, except expenditure incurred on acquisition of any land including long term lease, goodwill or financial instrument.
Our Comments:
- Under the Act, undertaking which commences generation of power on or before Mach 31, 2011 shall be eligible for profit linked incentives. The DTC grandfathers those undertakings which are eligible to claim the exemption under Act as on Assessment year 2012-13
- Accordingly, an issue arises as to whether an undertaking which commences generation of power during the period April 1, 2011 to March 31, 2012 will be eligible for profit linked incentives and thus grandfathed under DTC. Though the intention seems to provide the benefit to undertakings commencing generation of power even beyond March 31, 2011, the same can be implemented only on amendment in the Act. In view of this, this issue needs to be suitably represented before the Ministry in the forthcoming budget.
- It has been provided that the profit linked deduction under DTC shall be computed as per the provisions of the DTC, but no capital expenditure would be allowed. Accordingly, there is an ambiguity as to whether depreciation on the WDV carried forward from the Act would be allowable under DTC and thus would need to be adequately addressed.
- The proposal to allow power companies to offset losses against profits of other infrastructure projects or corporate income would be a welcome measure.
- As such, continuation of these tax incentives to new power undertakings under the DTC, though under a restrictive grandfathering clause, is still a positive step. The grandfathering provisions would provide some relief to the existing and new power undertakings.
Concluding Remarks:- Undoubtedly, the DTC has done more good to the power industry, for instance, relief by way of grandfathering clause and removal of MAT based on Gross assets, there are certain provisions where further clarity would be required. For e.g. DTC has no specific provision for grandfathering of unutilized MAT credit available under the Act.
