Union Budget 2022-23 – Expectations of the Renewable Energy Industry

20 January 2022

Union Budget 2022-23 – Expectations of the Renewable Energy Industry

Authored by Shyam Sharma, CFO – O2 Power

The Government of India (GoI) has set very ambitious target of commissioning 500 GW of renewable energy capacity by the year 2030. To achieve this target, it should follow up with commensurate impetus in the form of direct and indirect tax policy formulation and implementation, priority lending at cheaper rates, easy exit mechanisms through favorable Infrastructure Investment Trusts (InvIT) regulations. As Independent Power Producers (IPPs) in the renewable energy sector, we too expect few crucial announcements from the Union Budget 2022-23. These are summarized as follows:
Direct Tax
  • Extend time of commencement of manufacturing under section 115BAB (Lower corporate tax of 15%) by another 5 years to 31st March 2028 to attract more foreign capital under the Make in India initiative
  • Section 94B:
    • Exclude guarantee provided by non-resident parent company to the subsidiary for availing project financing from provisions of section 94B(1)
    • Increase 30% EBIDTA limitation on interest payment to a non-resident associated enterprise under section 94B(2) to a higher percentage to ~60% to meet higher capital requirement of Infrastructure projects
  • Extend base tax rate of 5% under section 194LC to include INR denominated ECBs / NCDs
  • Allow CSR expenses and other expenses incurred by corporates for social upliftment and employee welfare during COVID-19 as deductible expenditure
  • Exempt applicability of section 79 (lapse of carry forward losses) on transfer of more than 51% shares of a company to REIT / InvIT structure to boost long term infrastructure investment
  • Reduce period of holding for REIT / InvIT units from the current 36 months to 12 months, so that long term capital gains are in line with time period for listed equity shares
  • Exempt Sovereign Wealth Funds (SWFs) / Pension Funds (PFs) for investments made via their wholly owned subsidiaries outside India. This will help attract more foreign investments and capital for the country’s infrastructure space
Indirect Tax
  • Reinstate “solar power generating system” in new entry at serial no. 201A in Schedule II of Notification No. 1/2017 – Central Tax (Rate) dated 28.06.2017 in place of newly inserted term “solar power generator” to avoid different interpretation by the industry and GST officers. This will otherwise result in unnecessary tax litigations and harassment of solar power developers
  • Continue exemption of import duty applicable on solar modules – The basic customs duty on solar modules is set to increase to 40% w.e.f. 1st April 2022. Considering that the domestic manufacturing capacity of modules is still under the development stage, it is important that the existing exemption on import duty on solar modules exist for another one year to avoid delays and allow Industry to achieve the commissioning targets
  • Changes in SEZ provisions to include RE projects in SEZs -- Presently setting up of a standalone power plant in SEZ by companies other than operating in IT / ITES SEZ is not permissible, thus restricting the scope for RE sector under Third Party / Group Captive structure. Considering there is a proposal to make significant changes in SEZ provisions, the RE industry seeks the inclusion of standalone RE units in SEZs to be eligible for the advantages accorded to sunrise sectors, be competitive in the world market and achieve net zero commitments
  • Make electricity taxable under GST – If the existing GST exemption on electricity is withdrawn, companies involved in setting up renewable energy plants will be able to avail GST credit on capital investment and input services, which can also be passed on to the final customer. This will also ease the burden of the recent increase in GST rate from 5% to 12%
  • Provide separate pool of capital in the budget to central off-takers (SECI / NTPC / NHPC) and state discoms to compensate increased incidence of GST from 5% to 12% w.e.f 1st October, 2021 in one installment to already awarded projects. This pool can be created from increased tax collection from rate change. This will help discoms and off-takers to avoid passing on these additional costs to end consumers and IPPs not taking the hit due to delay in getting payments and increased interest costs
  • Allow insurance companies, provident funds / NPS and mutual funds to invest in bonds issued by operating infrastructure companies rated below AAA/AA to increase liquidity in local bond markets. Government can earmark one of the Public Financial Institution (in addition to IIFCL) to enhance credit of the bonds for a fee with a simple process to help deepening of the local bond markets and help in refinancing of operational Infrastructure projects
  • Implementation of Budget 2021 announcements:
    • Creation of National Bank for Financing Infrastructure and Development to provide long term funding to the infrastructure sector with initial capital outlay of INR 20,000 crores. This bank needs to start functioning at the earliest and further capital allocation needs to be done in this budget to free up loan books of the Banks/ Financial Institutions for greenfield projects
    • Allocation of INR Rs 1500 crores for funding IREDA to increase lending to the RE sector. However, given the increase in size of RE projects and to meet higher debt requirements per project, IREDA needs to be allocated more capital in this budget at concessional rate
  • IREDA, REC & PFC should also pursue raising higher level of ESG Green bonds at competitive rates to reduce their lending rates and be more competitive
  • Presently ‘Renewable Energy’ is clubbed within definition of ‘Power’ under priority sector lending provided by RBI. Due to stressed thermal power assets, majority of Banks are not lending to RE sector citing that their Power sector exposure is full. Industry request is to create separate category for Renewable Energy (solar, wind, solar wind hybrid, battery energy storage, biomass, hydrogen, small hydro) under priority sector lending to enable RE IPPs to get more bank funding
The suggested changes if enabled, will go a long way in providing sustainable impetus to the growth of the renewable energy sector. As industry players, we await a positive action from the Finance Ministry this Union Budget.

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