Union Budget 2016: Announcements in the Energy sector

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Information about Union Budget 2016: Announcements in the Energy sector

Published on March 15, 2016

Author: BMRAdvisors

Source: slideshare.net

1. About BMR Advisors | BMR in News | BMR Insights | Events | Feedback | Contact Union Budget 2016: Announcements in the Energy sector Overview Economic Survey 2016 presented that fiscal year 2014-15 delivered the highest ever capacity addition (26.5 MW) in the power sector. This is higher than average annual addition of around 19 GW over the previous five years. Renewable energy targets have been revised from 32 GW to an ambitious 175 GW by 2022. This moves the country towards a sustainable development model. In the latest round of auctions under the National Solar Mission (‘NSM’), all-time low tariffs of INR 4.34/kWh were bid, making grid parity for solar generation a reality. Following statistics and major policy initiatives in the energy sector, as revealed by the Economic Survey, are relevant to note:  Domestic annual production of crude oil has fallen by 0.8 percent during April- December 2015, vis-à-vis the same period during the previous year. Gas production during April-December 2015 was 24.7 BCM against 25.397 BCM during the corresponding period of 2014-15, showing a decline of 2.8 percent.  Amongst key challenges for Indian Oil & Gas sector, absence of a global gas market for benchmarking domestic gas prices in India has been at the forefront. Multiple formulae have been experimented with. However, market-determined arm’s length pricing for domestic gas, with an effective regulator, to provide adequate incentive for investment and also ensure competiveness and transparency remains the first- best solution that merits consideration.  Economic Survey also re-instates the industry’s expectation that petroleum products and natural gas should be included under the Goods and Services Tax (‘GST’) regime.  In order to promote the gas pipeline network across the country, the Economic Survey advocates use of the Viability Gap Funding as a tool for promoting pipeline assets creation and development of efficient markets.  The Economic Survey recommends rationalization of LPG subsidy, and doing away with exemption on import of LNG irrespective of end-use. Some of the major initiatives for traditional sources of energy in 2015-16 were as follows: Share Connect Please click the links below to read our comprehensive analysis. General amendments GAAR International Tax Amendments Transfer pricing Customs and excise Service tax Central sales tax GST Gokul Chaudhri +91 124 669 5040 gokul.chaudhri@bmradvisors.com Sumit Singhania +91 124 669 5066 sumit.singhania@bmradvisors.com Saurabh Kanchan +91 124 669 5125 saurabh.kanchan@bmradvisors.com

2.  Approval of Marginal Fields Policy for development of hydrocarbon discoveries made by national oil companies.  Approval of the policy framework to ease rigidities in PSCs and remove bottlenecks for early monetization of hydrocarbon discoveries.  Formulation of a Uniform Licensing and Open Acreage Policy with new contractual and fiscal regime. Major initiatives for renewable sources of energy in 2015-16 were as follows:  Solar Projects under the NSM: Approval of a scheme for setting up of 15,000 MW of grid-connected solar PV power projects under the NSM through NTPC Limited / NVVN (NTPC Vidyut Vyapar Nigam) in three tranches by the year 2018-19.  Solar Rooftop: Scaling up of Budget from INR 6 billion to INR 50 billion for implementation of grid-connected rooftops systems over a period of five years up to 2019-20 under the NSM.  Solar Parks: In pursuance of the Solar Parks Scheme, setting up of 25 solar parks and ultra mega solar power projects with an aggregate capacity of 20,000 MW in the next five years in various states and 34 solar parks with capacity of about 22,000 MW have been sanctioned in 22 states.  Solar Cities: Approval granted for 56 solar city projects under the Development of Solar Cities Programme.  Amendments in the National Tariff Policy 2005, were approved adding promotion of renewable power as a key objective of the policy and enhancing Renewable Purchase Obligation targets. Key announcements Policy announcements  Proposal to incentivize gas production from deep-water, ultra deep-water and high pressure-high temperature areas, which are presently not exploited on account of high cost and associated risks. Proposal under consideration for new discoveries and areas which are yet to commence production include:  providing calibrated marketing freedom; and  pre-determining a ceiling price on the principle of landed price of alternative fuels.  Drawing up a comprehensive plan for a period of 15 to 20 years, to augment investment in nuclear power generation. Budgetary allocation up to INR 30 billion per annum, together with public sector investments, is proposed to be leveraged to facilitate the required investment for this purpose.  Plan to achieve 100 percent village electrification by May 1, 2018. INR 85 billion Siddharth Tandon +91 124 669 5257 tandon.siddharth@bmradvisors.com

3. has been provided for Deendayal Upadhayaya Gram Jyoti Yojna and Integrated Power Development Schemes. Direct tax proposals Exemption of income of foreign company from storage and sale of crude oil stored as part of strategic reserves  It is proposed to amend section 10 to provide that any income accruing or arising to a foreign company on account of storage of crude oil in a facility in India and sale of crude oil therefrom to any person resident in India shall not be included in the total income, if:  such storage and sale by the foreign company is pursuant to an agreement or an arrangement entered into by the Central Government or approved by the Central Government; and  having regard to the national interest, the foreign company and the agreement or arrangement are notified by the Central Government in this behalf. The amendment is proposed to be given retrospective effect from financial year 2015- 16.  The proposal ought to incentivize private investment by foreign oil companies and / or strategic investors into setting up and maintenance of underground storage facilities as well as storing and selling crude oil from such facility. Extending benefit of initial additional depreciation under section 32(1)(iia) for power sector  At present, an additional depreciation of 20 percent is allowed in respect of cost of new plant or machinery acquired and installed by taxpayers engaged in the business of generation or generation and distribution of power. Such depreciation allowance is over and above deduction allowed for depreciation under section 32(1)(ii).  It is proposed to extend such additional depreciation to taxpayers engaged in the business of transmission of power, at the rate of 20 percent of actual cost of new machinery or plant acquired and installed in a previous year.  The above proposal is targeted to incentivise private investment in transmission infrastructure, which is crucial for ensuring seamless power supply across the breadth of the country. Phasing out of tax holiday for eligible activities under section 80IA and section 80IB(9)  Sunset date of March 31, 2017 with respect to tax holiday for business of generation, or generation and distribution, or transmission or distribution of power has been retained.

4.  In addition, sunset date of April 1, 2017 has been proposed under section 80IB(9), as the cut-off for commencement of commercial production of mineral oil and natural gas, to be eligible for tax holiday.  Accordingly, no deduction is to be available to an undertaking in respect of the abovementioned activities if eligible activities commence on or after April 1, 2017. Indirect tax proposals Rationalization of oil industry development cess on domestic production of crude oil  Oil Industry Development Cess on production of crude has been revised from a flat rate of INR 4,500 per metric tonne to 20 percent ad valorem. This has been done due to crude oil prices having plunged over the last couple of years but this cess has not been aligned with the fall in international crude oil prices.  While the industry expectation was levy of 8 percent ad valorem cess, levy of 20 percent may potentially be an acceptable benchmark for upstream players, especially in light of continued downward movement in crude prices. Re-alignment of customs duty exemption on imports for petroleum exploration  Re-alignment of present exemption from the levy of BCD and CVD available on the import of equipment required for undertaking petroleum exploration under various licenses such as pre-NELP contracts, NELP contracts, Marginal Fields Policy and Coal Bed Methane Policy.  Exemption available on such import of equipment through multiple entries have been unified under a single entry with unified set of conditions and list of goods.  Scope of exemption has now been extended to all petroleum exploration licenses issued or renewed after April 1, 1998. Supply of gas through pipeline deemed to be ‘inter-state supply’ for the purpose of Central Sales Tax Act, 1956, if gas transported from one state and taken out in another  In case gas sold or purchased has been transported through a common distribution system (such as pipeline) which co-mingles and is fungible with other gas in the pipeline, the transaction would be deemed to be a transaction of inter-state movement of goods for the purposes of central sales tax if such gas has been introduced in the pipeline in one state and taken out in another state. Excise exemption for specified goods required for the repair of identified equipment such as oil rigs and drilling ships  Excise duty on capital goods and spares thereof, raw materials, handling equipment and consumables, for repair of ocean going vessels has been exempted on clearances to a ship repair unit.  ‘Ocean going vessels’ defined to include tugs, dredgers, oil rigs, drilling ships and

5. jack up-rigs amongst other identified equipment. Clean energy cess renamed and increased  Clean energy cess has been renamed as ‘Clean Environment Cess’ and the rate for this cess stands increased from INR 200 per metric tonne to INR 400 per metric tonne. This increase will make the use of coal as a fuel an expensive alternative and would help the Government to fund its initiatives for a clean India. Increase in excise duty rate on Air Turbine Fuel (‘ATF’)  Excise duty rate on ATF has been increased from 8 percent to 14 percent. However, supply to scheduled commuter airlines operating under the regional connectivity scheme would continue to attract excise duty of 8 percent. The increase in the duty rate would adversely impact the already ailing aviation sector. Rationalization of BCD on coal, lignite and peat  Rationalization of BCD on import of all variety of coal, lignite and peat with rates being brought to 2.5 percent across varieties. This rate has been rationalised at 5 percent for certain other products such as coke and semi-coke of ‘coal, lignite and peat’. Incentives for equipment using solar energy  Excise duty exemption presently available to ‘solar lanterns’ has been extended to ‘solar lamps’.  Solar tempered glass or solar tempered (anti-reflective coated) glass used in manufacture of solar cells / panels / modules would now attract a concessional rate of BCD of 5 percent as against the present rate of 10 percent.  BCD on industrial solar water heater has been increased from 7.5 percent to 10 percent Rationalization of excise duty on parts used in the manufacture of specified goods for Wind Operated Electricity Generators (‘WOEG’)  Excise duty applicable on specified parts used in relation to the manufacture of rotor blades for WOEG has been rationalized:  Exemption on 5 specified items used for the above purpose has been withdrawn. These goods will now attract a concessional excise duty of 6 percent.  Excise duty on carbon pultrusions, used in relation to the manufacture of rotor blades for WOEG has been reduced from existing 12.5 percent to 6 percent  Above benefits are available subject to fulfilment of actual user condition Conclusion

6. The long standing demand of the upstream industry to transition to ad valorem levy of Oil Industry Development Cess has been granted, although the industry would have preferred a lower rate of cess. Enhanced budgetary allocation for renewable energy development is significant. Proposal to extend benefit of additional tax depreciation for investments in power transmission infrastructure ought to encourage new investments, even though demand of the industry, particularly renewables developers, to extend the sunset to March 2020, has not be acceded to. A number of regulatory initiatives taken in the previous financial year marks the policy thrust of the Government for energy sector, although a clear policy roadmap for full- fledged implementation of Revenue Sharing contract model vis-à-vis PSC continues to elude. From an indirect tax perspective, the focus of Budget proposals has largely been to rationalize and /or realign existing incentives. Overall, mixed outcome for the energy sector; hopefully, the Government will continue its policy thrust towards developing the sector’s resilience over the next financial year as well. BMR Business Solutions Pvt. Ltd. 36B, Dr. RK Shirodkar Marg, Parel, Mumbai 400012, India Tel: +91 22 6135 7000 | Fax: +91 22 6135 7070 BMR and Community BMR has a strong commitment to good citizenship and community service. We are as dedicated to community work as we are to client work. Wherever appropriate we partner with our clients in fulfilling our social responsibility. Through the firm’s ‘Go Green Initiative’ we adopt environment friendly practices at our work place. The firm actively supports SOS Children’s Village, Indian Red Cross Society and MillionTrees Gurgaon campaign. For more details on our social and environmental responsibility programme, click here. Disclaimer: This newsletter has been prepared for clients and Firm personnel only. It provides general information and guidance as on date of preparation and does not express views or expert opinions of BMR Advisors. The newsletter is meant for general guidance and no responsibility for loss arising to any person acting or refraining from acting as a result of any material contained in this newsletter will be accepted by BMR Advisors. It is recommended that professional advice be sought based on the specific facts and circumstances. This newsletter does not substitute the need to refer to the original pronouncements. Copyright 2016. BMR Business Solutions Pvt. Ltd. All Rights Reserved | In case, you do not wish to receive this newsletter, click here to unsubscribe

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