enr-pov-2014

8/11/2019 ENR-PoV-2014

1/10

Energy and

Natural ResourcesPost-budget sectoralpoint of view

INDIA UNION BUDGET 2014

8/11/2019 ENR-PoV-2014

2/10

Table of contents

1. Context

2. Budget proposals

3. Key policy/fiscal/tax proposals

4. Budget implications

5. Unfinished agenda

8/11/2019 ENR-PoV-2014

3/10

2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated withKPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. 3

The Energy and natural resource (ENR) sector plays an important role in driving the economic growthof a country. Access to quality and affordable power to each household, proper and efficient utilisationof natural resources are few objectives that policy makers and governments have repeatedly outlined,but have failed in implementing.

The sector has been facing enormous challenges over the last few years. The lack of an integratedenergy policy, non-availability of fuel such as coal and natural gas, delays in clearances andapprovals, environmental issues, high interest rates, lack of investments in exploration are certainissues that have led to the declining interest of investors in this sector. Several power projects over 50GW have been stalled due to fuel shortages, delays in environment approvals, lack of access to long- term capital, thereby as a resulting in decreased investments.

The Union Budget 2014 was expected to address quite a few of these challenges and therefore, theexpectations were high.

Context

8/11/2019 ENR-PoV-2014

4/10


Policy announcements India has at present about 15,000 km of gas pipeline systems. To complete the gas grid across the

country, an additional 15,000 km of pipelines are required. It is proposed to develop these pipelinesusing appropriate PPP models

The government will launch Deen Dayal Upadhyaya Gram Jyoti Yojana for feeder separation toaugment power supply to the rural areas, and for strengthening sub-transmission and distributionsystems

The government proposes to take up ultra mega solar power projects in Rajasthan, Gujarat, TamilNadu, and Ladakh in Jammu and Kashmir

The government will launch a scheme for solar-power-driven agricultural pump sets and water

pumping stations for energising one lakh pumps The government will start preparatory work for a new scheme, ultra-modern super critical coal-

based thermal power technology, to promote cleaner and more efficient thermal power. It hasalready allocated Funds have already been allocated for this purpose

Implementation of the Green Energy Corridor project will be expedited to facilitate evacuation ofrenewable energy across the country

The existing impasse in the coal sector will be resolved, and adequate quantity of coal will beprovided to power plants which are already commissioned, or to the ones that will becommissioned by March 2015. This will help unlock dead investments. An exercise to rationalisecoal linkages (which will optimise transport of coal and reduce cost of power) will be rolled out.

Recent policy updatesShale gas and oil Exploration Exploitation Policy by national oil companies (NOCs)The government has notified the policy guidelines for exploration and exploitation of shale gas and oilby NOCs, in their inland Petroleum Exploration Lease/Petroleum Mining Lease blocks awarded under the nomination regimes. As per the policy, NOCs will undertake a mandatory minimum work programmein a fixed timeframe for shale gas and oil exploration and exploitation, and this will help achieveoptimum accretion and development of shale gas and oil resources.

Policy for Geo-Scientific data generation for hydrocarbons in Indian sedimentary basinsGeo-scientific Data Generation Policy has been formulated for hydrocarbons in the country, which willbe a cornerstone for the launch of the Open Acreage Licensing Policy to promote exploration andproduction activities in India. The policy lists the following models: Non-exclusive multi-client model in areas where there are expressions of interest by service

providers to carry out survey Funding by the government for areas that do not receive any offer to conduct surveys, even after

two years of its launch.

Guidelines for allocation and supply of domestic gas to CNG (transport) and PNG (domestic)The guidelines have provided preferential status to city gas distribution entities with regard to supply ofdomestic natural gas for CNG (for transport) and PNG (for domestic).

Government to set up coal regulator via edictThe government announced the setting up of a regulatory body through an executive order, or an edict.The regulator is expected to have a say over the key area of formulating regulations, to specify thestandards of performance and norms of operational efficiency, except in the area of mines safety. Theregulator will also recommend for the government's consideration, the suspension or cancellation ofpermissions granted for opening a mine or coal seams.

Gujarat adopts new wind energy policyThe State of Gujarat state has unveiled a new wind energy policy that sets a new tariff for theprocurement of wind capacity, and exempts power producers from electricity duties.

Budget proposals

8/11/2019 ENR-PoV-2014

5/10


Key policy/fiscal/tax proposals

Direct tax No change in corporate tax rate, surcharge and education cess. Maximum effective tax rate in

case of domestic and non-resident corporates would continue at 33.99 per cent and 43.26 per centrespectively

A roll back mechanism in the APA scheme is proposed for a period not exceeding four previousyears preceding the first of the previous years, for which the advance pricing agreement applies

Under the existing provisions, the disallowance where taxes are not deducted or deposited, frompayments to residents, is restricted only to certain specified payments. It is proposed that the samewould now extend to all expenditure on which tax is deductible

It has been mentioned in the budget speech that resident tax payers would be enabled to obtain an

advance ruling in respect of their income-tax liability above a defined threshold. However, amention of the same in fine print appears to be missed out

Investment allowance of 15 per cent provided to companies engaged in the business ofmanufacture or production of an article or thing, for acquiring & installing new assets for more than INR25 crore in a previous year

Expenditure incurred on Corporate Social Responsibility (CSR) not allowable as deduction, except the CSR expenditure which is specifically covered in section 30 to section 36 of the Income Tax Act

Profits and gains of 100 per cent derived by an undertaking engaged in the business of generationor generation and distribution of power for a period of ten consecutive years, currently availablefor undertakings set up by 31 March 2014, has been proposed to be extended for a further period of three years i.e. upto 31 March 2017. This will is expected to boost investor confidence and helpplanning from a long term perspective

The existing provisions for interest payment made by a specified company (which includes anIndian company engaged in the business of generation, distribution and transmission of power) toa non-resident, in respect of borrowing made in foreign currency between 1 July 2012 to 1 July2015, is subject to withholding tax at a lower rate of 5 per cent. The same is proposed to beextended to 1 July 2017

It is proposed to put in place a specific taxation regime for providing the way the income in thehands of Infrastructure Investment Trust is to be taxed, and the taxability of the income distributedby such business trusts in the hands of the unit holders of such trusts.

Indirect taxCustoms duty Streamlined levy of Basic Custom Duty (BCD) and Countervailing Duty (CVD) on non-agglomerated

coal of various types:

Rate of BCD on coking coal and metallurgical coke increased to 2.5 per cent from nil; rate ofCVD decreased from 6 per cent to 2 per cent

Rate of BCD on steam coal and bituminous coal increased from 2 per cent to 2.5 per cent

Rate of BCD on anthracite coal and other coal reduced from 5 per cent to 2.5 per cent; CVDdecreased from 6 per cent to 2 per cent

Rate of BCD on reformate and other goods, under sub-heading 2707 50 00, is being reducedfrom 10 per cent to 2.5 per cent.

Full exemption from customs duty has been provided on the following:

Mineral oils including petroleum & natural gas , extracted or produced in the continental shelfof India, or the exclusive economic zone of India , for period prior to 7 February 2002

Liquefied propane and butane mixture, liquefied propane, liquefied butane and LPG for supply to Non-Domestic Exempted Category (NDEC) customers by IOC, HPCL or BPCL, retrospectivelyfrom 08.02.2013

8/11/2019 ENR-PoV-2014

6/10


Specified raw materials used in the manufacture of solar backsheet and EVA sheet, and flatcopper wire used in the manufacture of PV ribbons (tinned copper interconnect) for solar PVcells/modules

Re-gasified LNG for supply to Pakistan.

Rate of BCD reduced on the following:

Coal tar pitch and crude naphthalene from 10 per cent to 5 per cent

Propane, ethane, and other goods under sub-heading 2901 10 00, ethylene, propylene andbutadiene, and ortho-xylene from 5 per cent to 2.5 per cent.

Concessional rate of BCD at 5 per cent provided on machinery, equipment, etc. required for the

initial setting up of compressed biogas plants (Bio-CNG) BCD on machinery, equipments, etc. required for setting up of solar energy production projects is

proposed to be reduced to 5 per cent

BCD is proposed to reduced from 10 per cent to 5 per cent on forged steel rings used in themanufacture of bearings of wind operated electricity generators

A full exemption from special additional duty will be provided on parts and components requiredfor the manufacture of wind operated electricity generators.

Excise duty Full exemption provided to liquefied propane and butane mixture, liquefied propane, liquefied

butane, and LPG for supply to NDEC customers by IOC, HPCL or BPCL, retrospectively from08.02.2013

Clean energy cess increased from INR50 per tonne to INR100 per tonne

Excise duty on branded petrol reduced from INR7.50 per litre to INR2.35 per litre

Full exemption from excise duty on machinery, equipment, etc. required for the initial setting up ofcompressed biogas plants (Bio-CNG)

Excise duty is being reduced from 12 per cent to nil on forged steel rings used in the manufactureof bearings of wind operated electricity generators

Full exemption from excise duty is being proposed for the following:

Solar-tempered glass used in the manufacture of solar photovoltaic cells/modules, solar powergenerating equipment/system, and flat plate solar collectors

Machinery, equipment, etc. required for setting up of solar energy production projectsbacksheet ,and EVA sheet used in the manufacture of photovoltaic cells/modules , andspecified raw materials used in their manufacture

Parts consumed within the factory during of production for the manufacture of non-conventional energy devices

Flat copper wire used in the manufacture of PV ribbons (tinned copper interconnect) for use in the manufacture of solar cells/modules

Machinery, equipment, etc. required for setting up of compressed biogas plant.

The rate of clean energy cess levied on coal, lignite and peat is being increased from INR50 per tonne to INR100 per tonne.

Service tax The service tax rates have remained unchanged.

8/11/2019 ENR-PoV-2014

7/10


Budget implications

Overall, we believe that the budget has been very positive for the power sector as a whole, thoughdisappointing from the gas sector perspective.

The budget has attempted to address the short-term challenges for the power sector, and at the same time laid a roadmap for more holistic measures over the medium-to-long-term as well.

Assurance to ensure availability of adequate coal for power projects, that would come up or havealready come up by March 31 2015, is a positive move. Investors have been provided comfort in thefact that mining issues shall be resolved, even if it means revisiting the Act, which is an importantstatement of intent (this however, needs to be followed up with concrete measures). Rationalisation ofcoal linkages can help ensure more coal availability, and also substantial reduction in the logisticscosts for the country (KPMG in India has estimated such savings to be about INR5000 crore perannum a few years back).

The 10-year tax holiday under 80 IA was extended till 31 March 2017; this can provide long-term clarityfor investment decisions, as against the current practice of yearly extension. Given the long-termenergy needs of the country, clear focus on renewable energy, especially solar, was heartening tonote. Ultra mega sola projects, focus on washed and crushed coal, looking at ultra-modern super-critical-technology based coal projects, were very positive measures announced in the budget. Therehas been an increase in the clean energy cess from INR50 per tonne to INR100 per tonne to providefinancing for the Green Energy initiatives. While this may lead to certain increase in the cost ofgeneration for the coal-based power projects, but from a long-term perspective it is expected to bebeneficial for the sector.

We believe that players will need to revisit some of the business models around renewable energy,especially solar and wind, in light of the above pronouncements.

However, the oil & gas sector has been a disappointment. The budget seems to have laid a majorstress on the usage of piped natural gas (PNG), and has proposed a plan to build 15,000 km of gaspipelines using PPP models. There has also been a mention of accelerating production of coal -asedmethane (CBM) gas as well. However, it failed to address the core issues around unavailability ofdomestic gas, uncertainty on gas pricing, issue of stranded gas-based power projects, and unrealisticbidding mechanism of pipelines that are the key issues that need resolution. There has also been nomention of promoting RLNG in other segments such as power, fertiliser or large industries, whichcould have encouraged availability of pipelines and RLNG terminal for investors to come in. Further,no incentives have been announced to encourage investments in the upstream sector, despite lack ofresponse from earlier NELP rounds.

One of the key demands for the sector has been to have an access to long tenure funds, and reductionof cost of financing. Banks have been encouraged to raise long tenure funds that will not beconsidered for SLR and CRR requirements, thus reducing the costs to developers. The budgethighlighted the need to work on revival of stressed banking assets in infrastructure, and if this isfollowed up by concrete steps, the same can help ensure that the sector is not saddled with strandedprojects.

Infrastructure Investment Trust (IIT) structure to raise capital was extended to infrastructure projectswith assurance to look into tax incentives pass through, so as to avoid double taxation issues thatwere witnessed for real estate investment trust structures. This would provide an alternative to raiseequity capital to developers.

8/11/2019 ENR-PoV-2014

8/10


Unfinished agenda

As the Union Budget 2014 addresses the issues to drive growth for the energy sector, there are fewmore key interventions required for the sector to get back on track. (Please note that the list below isnot exhaustive , and is only intended to highlight key issues.)

Development of an 'integrated energy policy'Currently, due to low coal prices, other fuels such as gas and renewable sources are not being utilisedefficiently. However, there is a high possibility of meeting short-to-medium-term deficits by extensivelyharnessing small hydro, wind and solar energy sources. An integrated energy policy that coversresource availability, requirements, pricing and prioritisation is expected to help identify an optimal'fuel basket'.

Reorienting CIL's focus towards exploring mines and using contract mining MDO approach for existingand new blocksThe intensity of exploration in India is low with about 4,200 km of coal bearing area yet to be explored.The drilling target for the 12th Five-Year Plan is 2.3 times the drilling carried out over the 11th Five-YearPlan. Considering the complexities involved in obtaining clearances and rehabilitating displacedpeople, it may be important for the CIL to focus on exploration activities. Further, the Coal Mine(Nationalisation) Act should be repealed to allow merchant mining. Private players can be invited toparticipate through the contract mining MDO model for existing blocks to improve productivity. TheMinistry should take measures to increase bankability of coal mining projects (directly or on the basisof MDO) by providing easy rights to lenders on security and substitution of developers/contractors.

Repowering old state and central generating stations and outsource O M operationsSome state and central power generating stations have been operating for more than 30 years,resulting in wastage of precious natural resources owing to high consumption requirements, and someof them fare poorly on operational parameters when compared to private generating stations.Considerable efficiency gains can be achieved by establishing a power plant with new technology onexisting sites and/or outsourcing operations to private players in few other cases.

Implementing distribution reforms in a time-bound mannerCross-subsidy needs to be eliminated, as proposed by the Electricity Act, and open access must beenforced. States that do not implement these measures should be deemed ineligible for utilising thegrants by the central government. Further, it is important to introduce the concept of retail supplylicensee who can contract between consumers and generators. Retailers will contract with

generators in a flexible manner and not be bound by standard bidding documents and coal indexationconstraints. The model for private sector participation in power distribution (distribution franchisee,PPP and privatisation) should be customised. This is important to develop a vibrant power market andreduce aggregate technical and commercial (AT&C) losses.

Phasing out of Regulatory Assets and Enhancing substantially the capacity of Regulatory InstitutionsRegulatory assets were created to ensure that the tariff increases are gradual, and were intended tobe phased out over a period of time. However, despite so many years, these assets still remains on thebooks of distribution companies, and are a hindrance for new investments to come in; there is anurgent need to liquidate these assets.

More efforts needs to be undertaken to strengthen the regulatory institutions , given the changing

requirements of the sector.

8/11/2019 ENR-PoV-2014

9/10


Creating smart grids to meet future energy requirementsSmart grids will likely benefit users across the value chain, from generators to distributors to endconsumers , by the integration of renewable energy sources, reduction of commercial losses andoperating expenses and decrease in energy bills for end users. The government must support smartgrids by defining proper energy prices, introducing time-of-day tariff, training people to deal with latest technologies and providing adequate budgetary support for upgrading legacy systems.

Direct tax

Extension of infrastructure status to gas projects for the purpose of a 10-year tax holiday underSection 80-IA

Extending the validity of the deduction u/s 80IB (9) for the refining business Amendment in section 35AD to crude oil pipelines and the dedicated pipelines for supply of

petroleum products to a specific consumer

In view of the re-investment needs by the holding company in the power sector, it was envisaged that dividend distribution tax should be levied only on the ultimate parent company level andspecial purpose vehicles should be exempted.

Indirect tax Capital intensive nature of hydro projects makes them appear unattractive in terms of higher

tariffs. The following fiscal incentives could have helped the sector:

Exemption of excise duty on cement, steel and equipment (hydro-mechanical and electro-mechanical)

Exemption of service tax on construction related activities of power plants.

8/11/2019 ENR-PoV-2014

10/10


Thank You

The information contained herein is of a general nature and is not intended to address thecircumstances of any particular individual or entity. Although we endeavour to provide accurate and

timely information, there can be no guarantee that such information is accurate as of the date it isreceived or that it will continue to be accurate in the future. No one should act on such information

without appropriate professional advice after a thorough examination of the particular situation.

2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network ofindependent member firms affiliated with KPMG International Cooperative (KPMG International), a

Swiss entity. All rights reserved.

The KPMG name, logo and cutting through complexity are registered trademarks or trademarks ofKPMG International.

Contacts

Dinesh KanabarDeputy CEO andChairman Sales & MarketsT: +91 22 3090 1661E:[email protected]

Arvind MahajanPartner and HeadInfrastructure and Government ServicesT: +91 22 3090 1740E:[email protected]

Manish AggarwalPartner and HeadEnergy and Natural ResourcesT: +91 22 3090 2625E:[email protected]

enr-pov-2014

Documents