Gokul Chaudhri

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TRANSITION FROM ACCELERATED DEPRECIATION TO GBI | 1

C h a l l e n g e U s


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Gokul Chaudhri | Partner | BMR Advisors

IPPAI-MNRE Conference 2009December 17, 2009 | Hotel Imperial | New Delhi

TRANSITION FROM ACCELERATED DEPRECIATION

TO GENERATION BASED INCENTIVE


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| 3TRANSITION FROM ACCELERATED DEPRECIATION TO GBI

DISCLAIMER

This presentation provides general information existing at the time of

preparation. The presentation 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 publication will be accepted by

BMR Advisors. It is recommended that professional advice be taken

based on the specific facts and circumstances. This presentation does not

substitute the need to refer to the original pronouncements


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CONTENTS

WIND ENERGY

A perspective

Direct tax incentives

Indirect tax incentives

TRANSITION FROM ACCELERATEDDEPRECIATION TO GENERATION BASED

INCENTIVE (GBI) A pilot scheme

Disbursement mechanism

Tax issues

Concluding remarks


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WIND ENERGY

APERSPECTIVE


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Overview

Currently, India occupies fifth position globally with an installed capacity ~ 10,891 MW (as onOctober 31, 2009)

Wind energy share in Indias total installed power generation capacity ~ 7 percent

Benefits of wind power

Zero cost of fuel and low cost of operation and maintenance

Short gestation periodClean energy with no adverse environmental effects

Opportunity landscape

Indias wind power potential is estimated at 48,561 MW

Capacity addition programmes

11th

Plan ~ 10,500 MW Cumulative 12th & 13th Plan ~ 22,500 MW

Incentives

Several fiscal concessions / exemptions are available to independent power producers (IPPs) inthe wind sector some of these are discussed in subsequent slides

WIND ENERGY A PERSPECTIVE


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10 year tax holiday in a block of 15 years for:

Generation or generation and distribution of power

Transmission or distribution of power by laying new distribution lines

Tax holiday available to an undertaking which begins to generate power or starts

transmission or distribution by laying a network of new transmission / distribution linesbefore March 31, 2011

Accelerated depreciation (80 to 100 percent) on Written Down Value (WDV) basis forenergy saving and renewable energy devices such as wind mills, solar cookers etc

Additional depreciation of 20 percent

One time election to power generating companies to claim depreciation on straight-line basis (SLM) available

INCENTIVES FOR WIND ENERGY DIRECT TAX


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GBI instead of accelerated depreciation examined in the subsequent slides

Thrust of fiscal incentives for mega power projects (includes hydro power projects of

specified capacities); eligible for complete customs and excise duty exemptions

Power projects, renewable or otherwise, not qualifying as mega power projectseligible for concessional rate of customs duty at 18.62 percent (as against 21.52percent)

Concessional rates for excise (Nil rate of duty as against 8 percent) and customs duty(Nil to 5 percent of BCD as against 7.5 percent / 10 percent) available for specificrenewable sources of energy like wind, solar, biomass etc

Renewable energy devices typically attract a lower VAT rate of 4 percent

Deemed export benefits available; input side costs reduced by availing deemedexport benefits like Advance Authorization or Deemed Export Drawback

INCENTIVES FOR WIND ENERGY INDIRECT TAX


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TRANSITION FROMACCELERATEDDEPRECIATION TO GBI


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TRANSITION FROM DEPRECIATION TO GBI

India occupies fifth positionglobally in the installed capacity, however the power

generated is low [installed wind power capacity (10,891 MW) of 22.42 percent of thetotal potential (48,561 MW)]

Historically, the wind energy sector attracted investments under the accelerateddepreciation route this resulted in a marginal benefit due to the offsetting impact ofaccelerated depreciation on tax holiday

Thus, the benefit of accelerated depreciation route losing its importance

Gradually, the focus is on incentivizing generation of power from renewable energyrather than on building capacities and creation of capital assets

Considering the need of power generation and objectives of investors, a proposal toprovide a choice between accelerated depreciation benefit and GBI to IPPs has beenmooted

For this, the Government has announced the scheme of GBI for wind energy


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GBI A PILOT SCHEME

GBI for grid connected wind power projects which are

certified by concerned utility announced by Ministry ofNew and Renewable Energy (MNRE)

GBI of Rs 0.50 per unit(kwh) for a period of 10 yearsto the eligible project promoters

Scheme applicable to wind power projectscommissioned for sale of power to the grid; notapplicable for capacities set up for captiveconsumption, third party sale etc

Projects notto claim benefit of accelerateddepreciationunder the Income tax Act (IT Act)

Projects to have minimum installed capacity of 5 MW

and to be installed at project sites approved by theCenter for Wind Energy Technology (C-WET)

GBI to encourage actual energy generationratherthan capacity addition only, resulting in optimumutilization of wind resource


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GBI DISBURSEMENT MECHANISM

GBI would be disbursed by Indian Renewable Energy Development Agency (IREDA)

through e-paymenton a half yearly basis

This incentive is over and above the tariff approved by the State Electricity RegulatoryCommissions

The distributor / utility will provide a periodical certificateto the IPP regarding the netelectricity fed to the grid

Incentives shall be disbursed by IREDA, based on the grid synchronization letter andcertified information about the net electricity fed to the grid from the wind power project

Project developer will have to submit a self declaration about non-claiming ofaccelerated depreciationto IREDA

Copy of income tax return at the end of each financial year to be submitted with IREDAto establish that the benefit of accelerated depreciation has not been claimed


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GBI ISSUES

Depreciation

Whether accelerated depreciation means the higher rate on WDV basis in comparisonto SLM basis?

In case the SLM rates are not to be considered for this purpose -

Whether accelerated depreciation means the higher rate of 80 percent on windmills as compared to the general rate of 15 percent?

Whether accelerated depreciation also includes additional depreciation of 20percent?

In case accelerated depreciation refers to higher rate of 80 percent available towind mills and / or additional depreciation of 20 percent as against the general rateof 15 percent would the claim of depreciation at general rate be correct under theIT Act?


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GBI ISSUES (CONT)

Applicability in case of two undertakings

In a situation wherein there are two undertakings one utilizing its capacities for thirdparty and captive consumption and the other one utilizing its capacities towards grid, thefollowing issues arise:

Whether the GBI is available for the undertaking dedicated to the grid or is itconnected to the entity?

Whether there can be a different basis for claim for depreciation for the differentundertakings within the company that is to say, non-accelerated basis for theeligible undertaking and accelerated depreciation for the non-eligible undertakings?

Direct tax Code (DTC) Bill

The DTC proposes a shift from profit linked incentives to investment linked incentive forgeneration / distribution of power - applicability and impact?


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CONCLUDING REMARKS

The policy for wind energy is continuously evolving

Phase I ~ Accelerated depreciation

Under Phase I, investor have only one option, ie availing the accelerateddepreciation benefit useful for diversified profit making businesses

Phase II ~ GBI

Under Phase II, the investor has an option to avail the benefit of eitheraccelerated depreciation or GBI Useful for IPP investors

Phase III ~ CERC tariff regulations for wind energy

Under Phase III, the investor has an option to either follow the generic CERCtariff norms or seek an approval for a project specific tariff

The new regulations, provide an option to the developer to avail the benefit ofeither accelerated depreciation or GBI for determining the tariff Both thebenefits to be subsumed in the tariff

The above permutations are likely to have a significant bearing on the IRR of aproject


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