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PRE BUDGET REPORTS

Power plant Equipments: Levy customs duty on mega and UMPP project imports

Power is the backbone of industrialisation and agriculture in the country. The poor quality and indadequate supply of the same is often cited as bottleneck for rapid economic progress of the country. Power sector, which for long since independence been the domain of Central & State utilities has seen change in dynamics with increased participation facilitated by reforms brought in by Electricity Act 2003. On the back of enabling regulatory/tax environment and strong demand for power in the country lot of private sector players got into the power generation.

Moreover the country made efforts to bring in Supercritical technology which as seen as more greener and environment friendly as well as higher rating equipments from subcritical 500/600 MW utility power equipments to 660/800 MW super critical equipments.

On the back of robust opportunity presented there are new bred of equipment manufacturers such as L&T-Mitsubishi, BGR-Hitachi, JSW-Toshiba, Bharat Forge-Alstom and Doosan Heavy Industries forayed into the sector, along with existing players such as BHEL, Thermax and Cethar Vessels strengthening their product offerings to include supercritical sets with appropriate technology transfer or JV.

Offlate the optimism of private power project developers has given way to despair with surmounting concerns such as inadequate fuel, Load shedding by SEBs due to their precarious poor financial position instead of buying high cost power, rising interest rates, land acquisition issues, environmental clearance and other approval delays which inturn slowed down the investment in the sector. Resultantly the orders for the equipment manufactures has got delayed with just a handful of major projects got finalised in the last 12 months. On extreme end, some of the orders have been cancelled by some private players.

On positive side, the commitment from Prime Minister in addressing issues relating to coal availability for power sector recently and legal tussle that held up the NTPC bulk tendering coming to conclusion are cheers to the industry as they speed up order finalization. On Feb 15, 2012 the PMO has issued a press note stating, the committee headed by the Principal Secretary to Prime Minister on its meeting on Feb 1, 2012 agreed that Coal India will sign Fuel Supply Agreement (FSAs) with power plants that have entered into long-term PPAs with power distribution companies and have been commissioned/would get commissioned on or before March 31, 2015. Moreover for power plants that have been commissioned upto Dec 2011, the FSAs will be signed before March 31, 2012. The litigation between NTPC and Ansaldo Boilers India relating to disqualification of later from bidding for boiler package of former's 11 X 660 MW bulktendering that held up the finalization of boiler package (as well as related stem turbine generator package) got concluded in Feb 2012 with judgment in favour of NTPC. Consequently NTPC opened the price bids for Boilers by end of Feb 2012 where BGR Energy emerge L1.

Government of India wants to improve the power supply has encouraged new vendors of power generation equipments apart from BHEL. Resultantly, now there is handful of newer players there by increase/increasing the BTG capacity to over 30000 MW per annum compared to just around 10000 MW per annum five years earlier.

On the back of 0% customs duty for mega power projects, the Chinese and Korean players armed with subsidies in their home country are highly competitive and managed to increase their market share to high twenties compared to zero ten years ago. A study conducted by the Committee set up under the Chairmanship of Member (Industry), Planning Commission in February 2010 stated disadvantage of about 14% in case of Mega / Ultra Mega Power Projects.

The recent rupee depreciation against Chinese currently moderated the competitiveness of Chinese equipment players. Moreover while the country's decision to keep away player with out domestic manufacturing facility from NTPC Bulk Tenders also ensures minimum orders for the domestic manufacturers to work with. But continued tax anomaly of allowing power plant equipments at zero percent import duty for mega power project will not do any good for the domestic equipment manufacturers and continue to hurt their competitiveness against Chinese players.

Inverted duty structure

In both industrial and utility boilers, the major inputs are boiler quality seamless steel tubes/pipes non-alloy/alloy steel. While the customs duty on tubes and pipes (7304) is 10% that of complete boiler is 7.5% in case of industrial boilers, 5% in case of non-mega power projects and 0% for mega power projects. This amounts to an anomalous and inverted customs duty structure and impacts the domestic manufacturers.

Budget wish list

Customs duty on tubes and pipes should be reduced from 10% to 7.5%, when imported for manufacture of boilers.

Import of power generation plant equipments under 0% category for mega power project and UMPP and others should be removed.

Impose 4% SAD on all types of projects and others which involve import of capital goods.

Power ministry was all along was against levying of import duty on power plant equipments for mega projects. But it has now agreed for doing away with 0% concessional duty imports for mega & UMPP projects. It proposed a import duty of 19% import duty (5% basis, 10% CVD and 4% SCVD) which will be taken up by Cabinet Committee on Economic Affairs (CCEA ) soon. This is much higher than the 10% basic customs duty and 4% CVD, which the Maira Committee had recommended and was backed by the Department of Heavy Industries. With consensus emerging with Government of India there is all likely imposition of import duty thereby doing away with concession duty on imports of power plants. This will do good for the domestic players who have created or in the process of setting up manufacturing capacity.