RE Industry’s Views on Union Budget 2023

12 February 2023

RE Industry’s Views on Union Budget 2023

Authored by Shyam Sharma - CFO, O2 Power

Budget Overview

With ‘Infrastructure’ and ‘Green Growth’ as two of the seven priorities, Union Budget 2023 is an extension of the budgets of the last two year. The focus is clearly on sustainable growth, on being consistent with the objective of achieving higher growth keeping fiscal deficit under control. These are evident from:

  • The enhanced capital expenditure on infrastructure development of 10 lakh crores (33% increase), highest ever allocation of 2.4 lakh crores that will act as a catalyst for higher employment, increased private investment and consumption leading to a multiplier effect for the economy
  • Minimal changes in tax laws, reasonable tax growth estimates aligned to GDP growth and the government’s intent to maintain consistency which will go a long way in boosting the confidence of business and investors
  • The consumption push by giving more surplus in the hands of individuals through increased income tax slab rates under new tax regime will create demand
  • The MSME sector, which is the highest employment generator, has been given a wide variety of sops. This will help revive the sector and create more jobs

 RE Sector Announcements to Achieve India’s Carbon Emission Goals

The government’s intent on bringing about a green economy is evident in the strong steps it has been taking towards that direction. The Union Budget provides further impetus to its green mission:

  • INR 35,000 crores provided in capital investment towards energy transition and the net-zero and energy security objectives
  • INR 19,700 crores allocated towards National Green Hydrogen Mission to achieve 5MMT production targets by 2030 thereby lowering carbon intensity
  • Viability Gap Funding for Battery Energy Storage Systems with capacity of 4,000MWH announced
  • Framework for Pumped Storage Projects will be formulated to make green energy more dispatchable and grid stabilization support
  • INR 20,700 crores investment, including central support of INR 8,300 crores, proposed for inter-state transmission system for evacuation and grid integration of 13 GW renewable energy to be constructed from Ladakh
  • 500 compressed biogas plants to be developed with Rs 10,000 crore under the GOBARdhan scheme for promoting a circular economy
  • In accordance with the vehicle scrapping policy mentioned in Budget FY22, funds have been allocated to scrap old vehicles. This will promote faster adoption of electric vehicles

 Indirect Taxes

  • Solar power plant and projects excluded from Customs Project Imports Scheme. This will help the sector reeling under high BCD of 40% and high module prices, and enable faster commissioning of projects
  • Customs duty exemption restricted up to 31 March 2024 on:
    • Tempered glass, flat copper wire used in the manufacture of solar cells and solar modules
    • Lithium-ion cell for use in the manufacturing of battery or battery pack of EVs or hybrid motor vehicle

  Direct Taxes

 While there has been no change in the corporate tax rate, the following has high impact on the RE industry:

  • 15% corporate tax rate for new domestic manufacturing companies has not been extended beyond 31st March, 2024. This is a major dampener for IPPs whose new projects which will start commissioning after 31st March, 2024 – it will hit the IRRs of projects already facing cost pressure due to delays due to GIB issue, delayed substations, higher module prices and GST rates. Going forward, it will also increase the bidding rates
  • Under section 56(2)(vii)(b), share premium received from non-residents in excess of the valuation as per the prescribed rule / method/ authority will now be taxed. For income tax purposes, infusion has to be at a price lower than or equal to the FMV on NAV / DCF method and is in conflict with FEMA pricing guidelines (FMV or higher). This will have an impact on cross border investments
  • Lower WHT of 5% under section 194LC has not been extended after 30th June, 2023. From July 1, 2023, tax on interest on ECB and NCDs under FPI route will be 20% + surcharge and cess. This will increase the cost of raising external debt for RE and infra projects which will again push up bidding prices
  • Repayment of capital by REIT / InvIT to unit holder will be taxed as Income from Other Sources without cost benefit

  HITS of Union Budget 2023

  • Higher overall capital outlay for infra and green energy leading to higher job creation, multiplier effect in the economy and sustainable economic growth amid fears of global recession
  • Focus on faster growth of green infra transmission from Ladakh will give impetus to new RE project development in most solar rich areas of India
  • Making Green Hydrogen a priority and allocating sizable funds for faster growth and adoption will lead to meeting carbon reduction goal timelines
  • Minimal changes in tax laws leading to a stable tax regime will improve business confidence

 Misses of Union Budget 2023

  • Non- extension of time of commencement of manufacturing under section 115BAB (lower corporate tax of 15%) post 31st March, 2024 is one of the major misses for the RE and manufacturing sectors
  • Non-extension of sunset clause of 5% WHT under section 194LC for ECB and NCDs under FPI route will lead to higher cost of borrowings for the sector
  • Non-rationalization of Section 94 B of Income Tax Act (limitation of 30% EBIDTA for claiming interest expenses under thin capitalization rules) for corporates is a disappointment
  • Exclusion of components for solar power projects from Customs Project Imports Scheme is a major dampener for IPPs and overall growth of the sector
  • No announcement on grand fathering of 0% BCD on solar projects bid out before March 2021 will lead to project delays, litigation for change in law (CIL) claims and affect viability of projects if discoms decide not to honor CIL claims
  • Non rationalization of GST under composite scheme for solar and wind projects will lead to higher costs

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