April 2, 2012
India

Windmill developers to lose tax breaks

Vidya Bala, BL Research Bureau, Business Line, www.thehindubusinessline.com 2 April 2012

Windmill developers will no longer enjoy lower tax outgo in the first year, for investing in windmills.

Effective April 1, accelerated depreciation – which allows the investing company to fast track the write-off of certain assets for tax purposes – will not be allowed to wind energy developers. The Income Tax department has amended the rules regarding this, through a notification.

Until FY-12, a deduction of up to 80 per cent was allowed if the wind project was commissioned before September of a fiscal. Projects commissioned in the next half of the fiscal got a 40 per cent deduction. Now developers will only be allowed 15 per cent depreciation.

But wind equipments will still enjoy the 20 per cent additional depreciation prescribed for power equipments in the recent Budget. That would make for an effective 35 per cent depreciation.

Accelerated depreciation allowed developers to reduce their tax outgo in the first year as the 80 per cent deduction of investments lowered the taxable profits.

According to Mr Hemal Zobalia, Tax Partner at KPMG India, quite a few investors took to wind energy development for the sake of enjoying tax breaks. This could be one reason behind scrapping the incentive.

Up to 2009-10, average wind energy utilisation was as low as 18 per cent, when they could have been scaled up to 30 per cent, that is the norm for the industry.

It was therefore believed that many developers neglected their farms or ran them ineffectively once they got the tax benefit.

It was in 2009 that the Government decided to give incentives to developers for their generation and brought in generation-based incentive scheme (GBI). But those who had claimed accelerated depreciation could not avail the generation based incentive (GBI).

The move is therefore expected to weed out players who are not serious about generating wind power. Other captive players in sectors such as textiles and cement who had wind power plans in hand may also see some impact.
Impact

But independent power producers who had claimed GBI and did not qualify for the accelerated depreciation may not stand to lose. The GBI gives a cash incentive of Re 0.50 a unit of electricity fed into the grid, over and above the tariff given by the state utilities. But this too awaits a renewal post the 11th Plan that just ended.

Small wind power equipment players too thrived on the market created by the accelerated depreciation scheme. But for large players such as Suzlon Energy, the business may be coming from more serious players availing GBI. The company, in a statement, said that it expects 70 per cent of its business in the current fiscal to come from customers with generation-linked business models rather than those with accelerated depreciation route.