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Budget 2019: Govt should lay out paradigm of energy security, sustainability policies for business models

Sumit Singhania
Commitment to enhanced and affordable energy access has had the government setting substantial targets for cleaner energy capacity addition.

The annual budget exercise over past years has witnessed several 'aha' moments for the energy sector. Roll out of the Hydrocarbon Licensing Policy to replace New Exploration Licensing Policy (NELP) and make way for uniform and open-acreage licensing policy, Discovered Small Field Policy to further reduce dependency on hydrocarbon imports, complete deregulation of diesel prices, natural gas pricing policy, mega merger of oil PSUs, levy of clean energy cess, and rationalisation of foreign direct investment (FDI) norms are a few policy measures that stand out.

Over this period, as crude oil prices discovered 'new normal' and reliance on cleaner energy (including LNG) steadily increased, government calibrated its energy policy to promote growth of traditional energy resources and renewables, simultaneously. Whilst largely, robust economic growth continues to drive demand for crude oil and natural gas, India can already boast of the second largest refining capacity in Asia, which is expected to increase three times by 2040.

Commitment to enhanced and affordable energy access has had the government setting substantial targets for cleaner energy capacity addition. This has resulted in close to 40 GW renewables capacity (out of total 75 GB installed capacity) getting added over last four years.

Amongst key measures, enhanced transparency in the bidding process through e-reverse auction; waiver of inter-state transmission charges and viability gap funding have been the game changer as the renewables attracted FDI in excess of $3 billion over the last four years, despite strong headwinds such as plummeting tariffs and funding constraints.

That said, the stage is set for the government to unleash next generational measures for the sector, even though, the industry wouldn't pin its hope on the impending budget, which is likely a vote-on-account than a full steam budget exercise in wake of general elections due later this year.

It is incumbent on the government to seize the opportunity and lay out the paradigm of its energy security and sustainability policies. These policies must look after new-age technologies-based business models, particularly in the area of energy storage, off-grid renewables, and promote technological innovations to sustain the vision of clean and affordable energy for all.

In terms of tax policies for the oil and gas, and power sector, a set of expectations €" old and new €" need to be catered to. To begin with, a uniform corporate tax rate (if 25 percent is the right equilibrium as touted at the beginning of the NDA regime in 2014) for all companies including the newly incorporated ones will be a great leveller.

At present, differential tax rate brackets linked to turnover thresholds mapped to certain FYs in the past, tend to put the large-sized businesses in an undue disadvantage. While the era of tax incentives is almost a thing of the past, it is important to calibrate tax policies (or parts thereof) to cater to sensitivities of certain critical sectors such as renewables and the entire value chain across the oil and gas sector, including refining and city gas distribution businesses.

Continuity of accelerated depreciation and doing away with debt-equity norms for disallowing interest cost on project funding, would serve these sectors quite well.

To catalyse the anticipated FDI flow to the tune of $20 billion by 2022, a set of tax measures to encourage investors in exploration and production (E and P) operations would be welcome. For example, tax amortisation of drilling and development expenses for E and P operators is a key area which requires better clarity given the inter-play between terms of the revenue sharing agreement and statutory provisions of the Income Tax law.

Rationalisation of minimum alternate tax (MAT) provisions, or at the very least lowering the rate of MAT, would be a big leg-up for the E and P operators and investors, and will allow a better playing field with more contemporary technology-driven businesses which are ruling the roost now, when it comes to seeking/negotiating terms of the trade with the government.

It is also, therefore, critical to provide for a tax break, say by way of accelerated amortisation, of research and development (R and D) and innovation costs. The same holds true for investments in renewables too as the technology play becomes vital in bringing about efficiencies to the projects.

From the customs duty standpoint, the industry would expect the government to bite the bullet in lowering duty rate on LNG import or even better, zero-rating of LNG import. Bringing oil and gas sector into the Goods and Services Tax (GST) fold has been another long standing 'ask' from investors' standpoint, as it may well hold the key to unleashing substantial efficiencies for the entire energy value chain.

Insofar as power sector is concerned, developers and engineering procurement and construction (EPC) service providers are facing a GST riddle; a host of recent but conflicting advance rulings has not helped investors' cause either. In one such example, characterisation of solar and wind projects as 'works contract' vis-à-vis contracts for supply of 'goods and services' has had experts divided; this needs a fix.

Amongst other key expectations, the renewables industry would expect exempt status being granted to 'Renewable Energy Certificates' and proposing tax incentives for city gas distribution projects.

Overall, expectations of energy sector from the upcoming budget (and for the next two to three consecutive annual budget exercises) will be to watch out against unintended anomalies in tax laws which tend to create impediments more often than not; cater to exclusivities of this sector and provide level playing field vis-à-vis fast growing new-age/technological businesses, and finally, endeavour towards better clarity in applying the law to project and investments.

(The writer is partner with Deloitte India)

Follow full coverage of Union Budget 2019-20 here



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