Authored by Shyam Sharma - CFO, O2 Power
The Government of India (GoI) aims to achieve 500 GW of renewable energy capacity by 2030. To reach this ambitious target, the GoI needs to provide impetus to growth by implementing favourable direct and indirect tax policies, offering priority lending at cheaper rates, and establishing mechanisms for easy exits through favourable Infrastructure Investment Trusts (InvIT) regulations.
Below is a summary of the expectations of Independent Power Producers (IPPs) in the renewable energy sector for the Union Budget 2024-25 to ensure faster growth:
Direct Taxation
Section 115BAB provides a concessional tax rate of 15% (plus surcharge and cess) for newly set up manufacturing companies (including power companies) that commenced manufacturing or power generation before March 31, 2024. Due to various commercial reasons such as delays in signing Power Purchase Agreements (PPA), issues with evacuation systems, land acquisition challenges, and right-of-way problems, many renewable power plants have commissioning dates delayed beyond March 31, 2024. Therefore, the sunset date under section 115BAB should be extended by at least five years.
Additionally, green hydrogen and green ammonia plants need to be included in the definition of manufacturing
Renewable Energy Certificates (RECs) and Voluntary Emission Reduction (VER) certificates should be included under Section 115BBG, attracting a lower corporate tax rate of 15% (plus surcharge and cess). The definition of carbon credit, which currently only includes incentives for reducing greenhouse gas emissions validated by the United Nations Framework Convention on Climate Change (UNFCC), should be amended to include all types of CERs, RECs, and VERs
Presently, Section 2(22)(e) creates a deeming fiction on any loan or advance given to a shareholder who is a beneficial shareholder with more than 10% voting power in the company, treating such loan or advance as a dividend in the hands of the shareholder and charging it at marginal tax rates. This is a significant issue for the renewable energy sector, which has substantial cash trapped in project Special Purpose Vehicles (SPVs) and discourages short-term loans to affiliates to meet funding requirements.
The RE industry requests the relaxation of deemed dividend provisions for loans between renewable sector / infrastructure sector group companies
Infrastructure business is highly capital-intensive, and infrastructure companies usually have a high asset base. Often, the book value of shares (as computed under Rule 11UA of the Income Tax Rules, 1962) exceeds the fair value of equity shares computed using internationally accepted pricing methodologies. The fair value of infrastructure companies tends to reduce over time as concession agreements or power purchase agreement lifespans diminish, causing book value of assets to no longer match the fair value.
Therefore, Rule 11UA should be amended to include internationally accepted pricing methodologies, such as the Discounted Cash Flow (DCF) method, in addition to the Net Asset Value (NAV) method for infrastructure companies
Currently, the transfer of shares of an SPV (not being a company in which the public is substantially interested) by the sponsor to the business trust (of more than 49%) in exchange for units of the business trust results in the lapse of brought-forward losses of the SPVs due to the provisions of Section 79 of the Act.
Tax exemption should be provided on the migration of SPVs into business trusts under Section 79
Reinstate the 5% TDS / WHT rates under Sections 194LC and 194LD to lower the costs of External Commercial Borrowings (ECBs) and INR-denominated bonds (issued to foreign investors) for RE companies, thereby increasing the availability of long-term financing options
Extend exemptions to Qualified Private Equity Investors (QPEs) at par with sovereign wealth funds and notified pension funds to boost capital flow into the infrastructure sector
Clarification from the CBDT is urgently needed to ensure that in instances where a foreign company has been subject to tax in India on income from its Indian investment, further upstreaming of funds from such a foreign company to its shareholders (through buybacks, capital reductions, etc.) should not be taxable in India.
Additionally, indirect transfer provisions should not trigger on upstreaming of income by unitholders of SEBI-registered vehicles (including REITs / InvITs) to their non-resident shareholders.
The term "goods" should be defined under Section 194Q to explicitly exclude shares and securities, avoiding confusion in transactions involving the sale of unlisted shares and securities.
Additionally, non-residents without a permanent establishment in India should be excluded from the applicability of TCS provisions.
Indirect Taxation
Finance
Implementing these measures will significantly boost the renewable energy sector and will help in achieving our government’s aggressive target of 500 GW capacity by 2030. The industry eagerly anticipates positive action from the Government of India through this Budget.
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