Corporate tax cut to lead to 2,500 cr power discoms savings

The Centre’s recent move to lower the corporate tax rate is a positive development for the power sector as it is expected to save 2500 crore a year for the state distribution companies.

The move would allow power generators with cost-plus power purchase agreements (PPAs) to pass on tax cuts to power distribution utilities, an official statement issued by the ratings agency said.

As per Icra’s estimates, the extent of benefit that would accrue to discoms from the power generation and transmission segments, mainly from central and state utilities, would be about 2500 crore annually.

Sabyasachi Majumdar, senior vice president and group head – Corporate ratings, ICRA, said, “The benefit so accrued to discoms in turn would enable them to lower their cost of supply and hence, reduce the gap between average tariff and cost of power supply by about 3 paise per unit sold at all India level. However, the extent of reduction in gap for the discoms would vary across the states depending on the mix of cost plus and bid-based PPAs and share of supply from central sector companies.”

Within the overall annual energy generation of 1250 billion units in FY2019, about 67per cent is cost-plus tariff based predominantly from central and state sector utilities. The central government entities like NTPC Ltd, NLC India Ltd, Damodar Valley Corporation, Power Grid Corporation of India Ltd and NHPC Ltd have cost-plus tariff structures, leading to pass through of lower tax incidence to the discoms, the statement said.

Also, the state-owned power generating companies and power transmission companies, would be benefited from the lower tax incidence, which would be passed on to the discoms under the regulated cost- plus tariff structure.

The effective tax rate for most of these central sector utilities over the past two years was in the range of 21per cent-23per cent, partly due to availability of tax holiday benefit (where MAT is applicable) for a large portion of their projects.

The power generation projects including renewable power projects having PPAs based on competitive bid- based tariffs and under the erstwhile preferential tariff route are expected to benefit from the lower tax rates.

For a wind or solar power project commissioned recently, ICRA estimates the reduction in tax rate will improve the internal rate of return by 40 basis points, though the impact on debt coverage metrics is not material.

For projects commissioned prior to March 2017 and availing the tax holiday under Section 80- IA, it remains to be seen, if the MAT credit entitlement accumulated during the tax holiday period can be set- off against the tax liability under the lower tax option in future, the statement said.