The Central Government has recently cut corporate tax rates across the board. As per the credit rating agency ICRA, state-run power distribution companies are likely to save Rs 2,500 crore from the tax rate cut annually.
As per the agency, the rate cut would enable power generating companies with cost-plus power purchase agreements (PPAs) to pass the benefits of the tax cuts to power distribution utilities. The extent of these benefits to power distribution companies is estimated at Rs 2,500 crore annually.
The benefits will, in turn, reduce the supply costs for power distribution companies. Industry estimates that the price gap between the average tariff and cost of power supply would reduce by about three paise per unit sold across India. However, the reduction in the price gap would vary from state to state, depending on their mix of cost-plus and bid based agreements.
The overall annual energy generation is 1,250 billion units, and about 67% would be from cost-plus tariffs from state and central sector companies. The central sector companies such as NLC India Ltd, NTPC Ltd, NHPC Ltd, Damodar Valley Corporation and Power Grid Corporation of India Ltd, operate on cost-plus tariffs structures. These companies can pass the benefits of corporate tax cuts to distribution companies.
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Also, the state-run power generating and transmission companies who benefit from the corporate tax cut would pass on the benefits to the power distribution companies under the cost-plus tariff structure.
The effective tax rate for most of these central sector power companies has been in the range of 21 to 23%, due to claiming of tax holiday benefit for a large portion of their projects. These companies paid tax under MAT (Minimum Alternate Tax). The power generation projects having PPAs based on competitive bid- based tariffs and under the erstwhile preferential tariff route are expected to benefit from the corporate tax cut.
In the case of wind or solar power project commissioned recently, ICRA estimates the reduction in tax rate will improve the internal rate of return of power distribution companies by 0.4%.
There is no clarity on the availability of MAT credit entitlement under the new regime in the case of projects commissioned before March 2017, and availing the tax holiday under Section 80- IA. The power generation and distribution companies would have MAT credit entitlement accumulated during the tax holiday period.
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I am a Chartered Accountant by profession. I specialise in personal taxes and corporate income tax matters. I am an avid reader and track developments in financial markets, economy and other market developments.