January 28, 2022 11:33:06 pm
Written by Jimit Devani and Parth Shah
It is again that time of the year when the country looks forward to announcements made in the Union Budget. Budget 2022 is all the more important as the world, including, India is trying to cope with the Covid-19 pandemic and its aftereffects. Also, Budget 2022 gains further importance as India has embarked upon the journey to becoming a $ 5-trillion economy by 2025, a target for which this budget will lay the foundation and roadmap.
Renewable sector is one of the main contributors to infrastructure development and is a theme for the future with the focus on electric vehicles, solar cells, green hydrogen, etc. At the CoP26 climate summit in Glasgow, India pledged to become a ‘net zero’ carbon emitter by 2070 and announced enhanced targets for renewable energy deployment and reduction in carbon emissions.
The government has rolled out various initiatives to boost the sector such as introducing new rules for the purchase and consumption of green energy, plans to undertake rooftop solar programme phase II, inviting bids for setting up solar manufacturing units under Production Linked Incentive (‘PLI’) scheme. In Budget 2021, additional capital infusion of Rs 10 billion and Rs 15 billion was done in Solar Energy Corporation of India and Indian Renewable Energy Development Agency respectively, to boost the renewable sector.
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As per data available, India’s renewable energy capacity crossed 100 gigawatts (‘GW’) in 2021. India is targeting about 450GW of installed renewable energy capacity by 2030 and ~60% of this is expected from solar. With India’s commitments in CoP26 and considering the target of capacity expansion, some tax policy reforms as listed below may be considered:
- Consolidated group taxation regime – One of the main expectations of the industry from an Income Tax Act, 1961 (‘Income Tax Act’) standpoint is the introduction of a consolidated group taxation regime. Currently, in the power and road sector, the players are required to have multiple Special Purpose Vehicles (‘SPVs’) due to regulatory compulsion. This results in an increased compliance burden and also tax loss of one entity cannot be set off against the profits of another, thereby leading to tax leakage at the group level. Introducing a group taxation regime will allow such tax losses to be set off thereby also improving the cash flow of the group.
- Deduction for capital intensive projects – The Income Tax Act provides a deduction in respect of the entire capital expenditure incurred on specified businesses. While various other businesses are included within the ambit of section 35AD, including power projects within the scope of section 35AD will provide a much-needed impetus to the sector. Setting up and operating renewable power plants is a capital-intensive project and hence this will provide a boost for incurring capital expenditure which is required in case of such projects.
- Thin capitalization norms – The government, in line with BEPS Action plan 4, introduced the concept of thin capitalization norms. Per this prescribed provision, there are restrictions on claiming interest or similar expenditure in excess of 30% of Earnings Before Interest, Tax, Depreciation and Amortization (‘EBITDA’). Infrastructure projects including power projects have long gestation periods and hence typically a group is funded through a debt structure. Accordingly, since it is a debt-intensive sector which is warranted due to commercial and business requirements, limiting interest deduction to 30% of EBITDA leads to increased tax cost and cash flow issues. Accordingly, the government should consider increasing the limit of 30% which will lead to savings in tax cost and in turn optimize the cash flows.
As seen above, the introduction/amendment of the provisions will have a far-reaching impact on the renewable sector and in turn will help the government facilitate ease of doing business. Let’s hope that along with our wish list and expectations, various initiatives are introduced by Budget 2022 to boost the Indian economy and also help fulfill India’s visionary CoP26 commitments.
Jimit Devani is a Partner and Parth Shah is a Manager with Deloitte Haskins and Sells LLP. iews expressed are that of the authors.
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