Expected Power Sector Reform In Budget 2008

By: EconomyWatch   Date: 30 June 2010

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The power sector needs sufficient funds to carry out various activities pertaining to the sector. One of the expected power sector reform in budget 2008, is that the government is planning to lift all restrictions pertaining to the inflow of venture capital funds in Budget 2008.

Re implementation of the pass through status to the power sector:By lifting impositions on the inflow of venture capital funds, the funds also become eligible for tax exemption in form of capital gains as well as dividends belonging to the company. Another expected power sector reform in budget 2008 is that, 78,577 mega watt capacity would be added to the existing capacity. This would incur a cost of Rs 10,30,000 crore. The venture capital funds are very feasible and serves as a means of fulfilling the energy security requirements of the nation. By realizing the benefits, the government has taken the decision of giving tax incentives to the power sector in India. This decision of the Indian government has been unanimously approved by all. Earlier the pass through status was given by the Indian government pertaining to the VC (Venture Capital) funds or venture capital funds belonging to as many as nine sectors. This also included the power sector but only last year, this facility was withdrawn. However, as an expected power sector reform in budget 2008, the government is intending to reestablish it once again.

Withholding tax:

One of the expected power sector reform in budget 2008 includes the removal of the withholding tax imposed on money borrowed from foreign infrastructural companies as well as financial organizations, which serve the power sector in India. This reform has been just proposed. If the proposal is implemented, the cost involved in borrowing funds from overseas companies may decrease by approximately 20 percent. The main aim of this reform is to decrease the power generation cost in the country. Withholding tax is usually imposed on the payment of interest on borrowings from overseas nations. The withholding tax rate is decided depending on the dwelling place of the creditor. Withholding tax is imposed to counterbalance evasion of taxes by international as well as domestic taxpayers.

Approximately Rs 10,00,000 crore investment is required by the power sector in the country. For the purpose, money invested in the domestic market alone is not sufficient. Funds from overseas also needs to be availed of. One factor, which is required to be kept in mind is that the objective of power sector reform is to allow consumers to enjoy cheap as well as dependable power in the country. Hence, the entire process ought to be cost effective and sound enough to encourage availability of foreign debts.

It is likely that if withholding tax is lifted funds worth Rs 52,500 crore would pass through during the tenure of the 11th Plan. The tax has also been withdrawn in the consumer's interest. It is ascertained that the above fund would be produced by means of several public as well as private sector projects in the overseas nations.

The idea of withdrawing the withholding tax was a long standing demand of the power sector industry.

Since the power sector industry is assumed to benefit from the infrastructural reforms, the coal sector is also being planned to be brought at par.


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