Energy and Natural Resources: Post-Budget Sectoral Point of View

Energy and
Natural Resources
Post-budget sectoral
point of view
INDIA UNION BUDGET 2014
Table of contents
1. Context
2. Budget proposals
3. Key policy/fiscal/tax proposals
4. Budget implications
5. Unfinished agenda
2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with
KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved.
3
The Energy and natural resource (ENR) sector plays an important role in driving the economic growth
of a country. Access to quality and affordable power to each household, proper and efficient utilisation
of natural resources are few objectives that policy makers and governments have repeatedly outlined,
but have failed in implementing.
The sector has been facing enormous challenges over the last few years. The lack of an integrated
energy policy, non-availability of fuel such as coal and natural gas, delays in clearances and
approvals, environmental issues, high interest rates, lack of investments in exploration are certain
issues that have led to the declining interest of investors in this sector. Several power projects over 50
GW have been stalled due to fuel shortages, delays in environment approvals, lack of access to long-
term capital, thereby as a resulting in decreased investments.
The Union Budget 2014 was expected to address quite a few of these challenges and therefore, the
expectations were high.
Context
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Policy announcements
India has at present about 15,000 km of gas pipeline systems. To complete the gas grid across the
country, an additional 15,000 km of pipelines are required. It is proposed to develop these pipelines
using appropriate PPP models
The government will launch Deen Dayal Upadhyaya Gram Jyoti Yojana for feeder separation to
augment power supply to the rural areas, and for strengthening sub-transmission and distribution
systems
The government proposes to take up ultra mega solar power projects in Rajasthan, Gujarat, Tamil
Nadu, and Ladakh in Jammu and Kashmir
The government will launch a scheme for solar-power-driven agricultural pump sets and water
pumping stations for energising one lakh pumps
The government will start preparatory work for a new scheme, ultra-modern super critical coal-
based thermal power technology, to promote cleaner and more efficient thermal power. It has
already allocated Funds have already been allocated for this purpose
Implementation of the Green Energy Corridor project will be expedited to facilitate evacuation of
renewable energy across the country
The existing impasse in the coal sector will be resolved, and adequate quantity of coal will be
provided to power plants which are already commissioned, or to the ones that will be
commissioned by March 2015. This will help unlock dead investments. An exercise to rationalise
coal linkages (which will optimise transport of coal and reduce cost of power) will be rolled out.
Recent policy updates
Shale gas and oil Exploration & Exploitation Policy by national oil companies (NOCs)
The government has notified the policy guidelines for exploration and exploitation of shale gas and oil
by NOCs, in their inland Petroleum Exploration Lease/Petroleum Mining Lease blocks awarded under
the nomination regimes. As per the policy, NOCs will undertake a mandatory minimum work programme
in a fixed timeframe for shale gas and oil exploration and exploitation, and this will help achieve
optimum accretion and development of shale gas and oil resources.
Policy for Geo-Scientific data generation for hydrocarbons in Indian sedimentary basins
Geo-scientific Data Generation Policy has been formulated for hydrocarbons in the country, which will
be a cornerstone for the launch of the Open Acreage Licensing Policy to promote exploration and
production activities in India. The policy lists the following models:
Non-exclusive multi-client model in areas where there are expressions of interest by service
providers to carry out survey
Funding by the government for areas that do not receive any offer to conduct surveys, even after
two years of its launch.
Guidelines for allocation and supply of domestic gas to CNG (transport) and PNG (domestic)
The guidelines have provided preferential status to city gas distribution entities with regard to supply of
domestic natural gas for CNG (for transport) and PNG (for domestic).
Government to set up coal regulator via edict
The government announced the setting up of a regulatory body through an executive order, or an edict.
The regulator is expected to have a say over the key area of formulating regulations, to specify the
standards of performance and norms of operational efficiency, except in the area of mines safety. The
regulator will also recommend for the government's consideration, the suspension or cancellation of
permissions granted for opening a mine or coal seams.
Gujarat adopts new wind energy policy
The State of Gujarat state has unveiled a new wind energy policy that sets a new tariff for the
procurement of wind capacity, and exempts power producers from electricity duties.
Budget proposals
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Key policy/fiscal/tax proposals
Direct tax
No change in corporate tax rate, surcharge and education cess. Maximum effective tax rate in
case of domestic and non-resident corporates would continue at 33.99 per cent and 43.26 per cent
respectively
A roll back mechanism in the APA scheme is proposed for a period not exceeding four previous
years preceding the first of the previous years, for which the advance pricing agreement applies
Under the existing provisions, the disallowance where taxes are not deducted or deposited, from
payments to residents, is restricted only to certain specified payments. It is proposed that the same
would now extend to all expenditure on which tax is deductible
It has been mentioned in the budget speech that resident tax payers would be enabled to obtain an
advance ruling in respect of their income-tax liability above a defined threshold. However, a
mention of the same in fine print appears to be missed out
Investment allowance of 15 per cent provided to companies engaged in the business of
manufacture or production of an article or thing, for acquiring & installing new assets for more
than INR25 crore in a previous year
Expenditure incurred on Corporate Social Responsibility (CSR) not allowable as deduction, except
the CSR expenditure which is specifically covered in section 30 to section 36 of the Income Tax Act
Profits and gains of 100 per cent derived by an undertaking engaged in the business of generation
or generation and distribution of power for a period of ten consecutive years, currently available
for undertakings set up by 31 March 2014, has been proposed to be extended for a further period of
three years i.e. upto 31 March 2017. This will is expected to boost investor confidence and help
planning from a long term perspective
The existing provisions for interest payment made by a specified company (which includes an
Indian company engaged in the business of generation, distribution and transmission of power) to
a non-resident, in respect of borrowing made in foreign currency between 1 July 2012 to 1 July
2015, is subject to withholding tax at a lower rate of 5 per cent. The same is proposed to be
extended to 1 July 2017
It is proposed to put in place a specific taxation regime for providing the way the income in the
hands of Infrastructure Investment Trust is to be taxed, and the taxability of the income distributed
by such business trusts in the hands of the unit holders of such trusts.
Indirect tax
Customs duty
Streamlined levy of Basic Custom Duty (BCD) and Countervailing Duty (CVD) on non-agglomerated
coal of various types:
Rate of BCD on coking coal and metallurgical coke increased to 2.5 per cent from nil; rate of
CVD decreased from 6 per cent to 2 per cent
Rate of BCD on steam coal and bituminous coal increased from 2 per cent to 2.5 per cent
Rate of BCD on anthracite coal and other coal reduced from 5 per cent to 2.5 per cent; CVD
decreased from 6 per cent to 2 per cent
Rate of BCD on reformate and other goods, under sub-heading 2707 50 00, is being reduced
from 10 per cent to 2.5 per cent.
Full exemption from customs duty has been provided on the following:
Mineral oils including petroleum & natural gas, extracted or produced in the continental shelf
of India, or the exclusive economic zone of India, for period prior to 7 February 2002
Liquefied propane and butane mixture, liquefied propane, liquefied butane and LPG for supply
to Non-Domestic Exempted Category (NDEC) customers by IOC, HPCL or BPCL, retrospectively
from 08.02.2013
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Specified raw materials used in the manufacture of solar backsheet and EVA sheet, and flat
copper wire used in the manufacture of PV ribbons (tinned copper interconnect) for solar PV
cells/modules
Re-gasified LNG for supply to Pakistan.
Rate of BCD reduced on the following:
Coal tar pitch and crude naphthalene from 10 per cent to 5 per cent
Propane, ethane, and other goods under sub-heading 2901 10 00, ethylene, propylene and
butadiene, and ortho-xylene from 5 per cent to 2.5 per cent.
Concessional rate of BCD at 5 per cent provided on machinery, equipment, etc. required for the
initial setting up of compressed biogas plants (Bio-CNG)
BCD on machinery, equipments, etc. required for setting up of solar energy production projects is
proposed to be reduced to 5 per cent
BCD is proposed to reduced from 10 per cent to 5 per cent on forged steel rings used in the
manufacture of bearings of wind operated electricity generators
A full exemption from special additional duty will be provided on parts and components required
for the manufacture of wind operated electricity generators.
Excise duty
Full exemption provided to liquefied propane and butane mixture, liquefied propane, liquefied
butane, and LPG for supply to NDEC customers by IOC, HPCL or BPCL, retrospectively from
08.02.2013
Clean energy cess increased from INR50 per tonne to INR100 per tonne
Excise duty on branded petrol reduced from INR7.50 per litre to INR2.35 per litre
Full exemption from excise duty on machinery, equipment, etc. required for the initial setting up of
compressed biogas plants (Bio-CNG)
Excise duty is being reduced from 12 per cent to nil on forged steel rings used in the manufacture
of bearings of wind operated electricity generators
Full exemption from excise duty is being proposed for the following:
Solar-tempered glass used in the manufacture of solar photovoltaic cells/modules, solar power
generating equipment/system, and flat plate solar collectors
Machinery, equipment, etc. required for setting up of solar energy production projects
backsheet ,and EVA sheet used in the manufacture of photovoltaic cells/modules , and
specified raw materials used in their manufacture
Parts consumed within the factory during of production for the manufacture of non-
conventional energy devices
Flat copper wire used in the manufacture of PV ribbons (tinned copper interconnect) for use in
the manufacture of solar cells/modules
Machinery, equipment, etc. required for setting up of compressed biogas plant.
The rate of clean energy cess levied on coal, lignite and peat is being increased from INR50 per
tonne to INR100 per tonne.
Service tax
The service tax rates have remained unchanged.
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Budget implications
Overall, we believe that the budget has been very positive for the power sector as a whole, though
disappointing from the gas sector perspective.
The budget has attempted to address the short-term challenges for the power sector, and at the same
time laid a roadmap for more holistic measures over the medium-to-long-term as well.
Assurance to ensure availability of adequate coal for power projects, that would come up or have
already come up by March 31 2015, is a positive move. Investors have been provided comfort in the
fact that mining issues shall be resolved, even if it means revisiting the Act, which is an important
statement of intent (this however, needs to be followed up with concrete measures). Rationalisation of
coal linkages can help ensure more coal availability, and also substantial reduction in the logistics
costs for the country (KPMG in India has estimated such savings to be about INR5000 crore per
annum a few years back).
The 10-year tax holiday under 80 IA was extended till 31 March 2017; this can provide long-term clarity
for investment decisions, as against the current practice of yearly extension. Given the long-term
energy needs of the country, clear focus on renewable energy, especially solar, was heartening to
note. Ultra mega sola projects, focus on washed and crushed coal, looking at ultra-modern super-
critical-technology based coal projects, were very positive measures announced in the budget. There
has been an increase in the clean energy cess from INR50 per tonne to INR100 per tonne to provide
financing for the Green Energy initiatives. While this may lead to certain increase in the cost of
generation for the coal-based power projects, but from a long-term perspective it is expected to be
beneficial for the sector.
We believe that players will need to revisit some of the business models around renewable energy,
especially solar and wind, in light of the above pronouncements.
However, the oil & gas sector has been a disappointment. The budget seems to have laid a major
stress on the usage of piped natural gas (PNG), and has proposed a plan to build 15,000 km of gas
pipelines using PPP models. There has also been a mention of accelerating production of coal -ased
methane (CBM) gas as well. However, it failed to address the core issues around unavailability of
domestic gas, uncertainty on gas pricing, issue of stranded gas-based power projects, and unrealistic
bidding mechanism of pipelines that are the key issues that need resolution. There has also been no
mention of promoting RLNG in other segments such as power, fertiliser or large industries, which
could have encouraged availability of pipelines and RLNG terminal for investors to come in. Further,
no incentives have been announced to encourage investments in the upstream sector, despite lack of
response from earlier NELP rounds.
One of the key demands for the sector has been to have an access to long tenure funds, and reduction
of cost of financing. Banks have been encouraged to raise long tenure funds that will not be
considered for SLR and CRR requirements, thus reducing the costs to developers. The budget
highlighted the need to work on revival of stressed banking assets in infrastructure, and if this is
followed up by concrete steps, the same can help ensure that the sector is not saddled with stranded
projects.
Infrastructure Investment Trust (IIT) structure to raise capital was extended to infrastructure projects
with assurance to look into tax incentives pass through, so as to avoid double taxation issues that
were witnessed for real estate investment trust structures. This would provide an alternative to raise
equity capital to developers.
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Unfinished agenda
As the Union Budget 2014 addresses the issues to drive growth for the energy sector, there are few
more key interventions required for the sector to get back on track. (Please note that the list below is
not exhaustive, and is only intended to highlight key issues.)
Development of an 'integrated energy policy'
Currently, due to low coal prices, other fuels such as gas and renewable sources are not being utilised
efficiently. However, there is a high possibility of meeting short-to-medium-term deficits by extensively
harnessing small hydro, wind and solar energy sources. An integrated energy policy that covers
resource availability, requirements, pricing and prioritisation is expected to help identify an optimal
'fuel basket'.
Reorienting CIL's focus towards exploring mines and using contract mining MDO approach for existing
and new blocks
The intensity of exploration in India is low with about 4,200 km of coal bearing area yet to be explored.
The drilling target for the 12th Five-Year Plan is 2.3 times the drilling carried out over the 11th Five-Year
Plan. Considering the complexities involved in obtaining clearances and rehabilitating displaced
people, it may be important for the CIL to focus on exploration activities. Further, the Coal Mine
(Nationalisation) Act should be repealed to allow merchant mining. Private players can be invited to
participate through the contract mining MDO model for existing blocks to improve productivity. The
Ministry should take measures to increase bankability of coal mining projects (directly or on the basis
of MDO) by providing easy rights to lenders on security and substitution of developers/contractors.
Repowering old state and central generating stations and outsource O&M operations
Some state and central power generating stations have been operating for more than 30 years,
resulting in wastage of precious natural resources owing to high consumption requirements, and some
of them fare poorly on operational parameters when compared to private generating stations.
Considerable efficiency gains can be achieved by establishing a power plant with new technology on
existing sites and/or outsourcing operations to private players in few other cases.
Implementing distribution reforms in a time-bound manner
Cross-subsidy needs to be eliminated, as proposed by the Electricity Act, and open access must be
enforced. States that do not implement these measures should be deemed ineligible for utilising the
grants by the central government. Further, it is important to introduce the concept of retail supply
licensee who can contract between consumers and generators. Retailers will contract with
generators in a flexible manner and not be bound by standard bidding documents and coal indexation
constraints. The model for private sector participation in power distribution (distribution franchisee,
PPP and privatisation) should be customised. This is important to develop a vibrant power market and
reduce aggregate technical and commercial (AT&C) losses.
Phasing out of Regulatory Assets, and Enhancing substantially the capacity of Regulatory Institutions
Regulatory assets were created to ensure that the tariff increases are gradual, and were intended to
be phased out over a period of time. However, despite so many years, these assets still remains on the
books of distribution companies, and are a hindrance for new investments to come in; there is an
urgent need to liquidate these assets.
More efforts needs to be undertaken to strengthen the regulatory institutions , given the changing
requirements of the sector.
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Creating smart grids to meet future energy requirements
Smart grids will likely benefit users across the value chain, from generators to distributors to end
consumers , by the integration of renewable energy sources, reduction of commercial losses and
operating expenses and decrease in energy bills for end users. The government must support smart
grids by defining proper energy prices, introducing time-of-day tariff, training people to deal with latest
technologies and providing adequate budgetary support for upgrading legacy systems.
Direct tax
Extension of infrastructure status to gas projects for the purpose of a 10-year tax holiday under
Section 80-IA
Extending the validity of the deduction u/s 80IB (9) for the refining business
Amendment in section 35AD to crude oil pipelines and the dedicated pipelines for supply of
petroleum products to a specific consumer
In view of the re-investment needs by the holding company in the power sector, it was envisaged
that dividend distribution tax should be levied only on the ultimate parent company level and
special purpose vehicles should be exempted.
Indirect tax
Capital intensive nature of hydro projects makes them appear unattractive in terms of higher
tariffs. The following fiscal incentives could have helped the sector:
Exemption of excise duty on cement, steel and equipment (hydro-mechanical and electro-
mechanical)
Exemption of service tax on construction related activities of power plants.
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Thank You
The information contained herein is of a general nature and is not intended to address the
circumstances of any particular individual or entity. Although we endeavour to provide accurate and
timely information, there can be no guarantee that such information is accurate as of the date it is
received or that it will continue to be accurate in the future. No one should act on such information
without appropriate professional advice after a thorough examination of the particular situation.
2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of
independent member firms affiliated with KPMG International Cooperative (KPMG International), a
Swiss entity. All rights reserved.
The KPMG name, logo and cutting through complexity are registered trademarks or trademarks of
KPMG International.
Contacts
Dinesh Kanabar
Deputy CEO and
Chairman Sales & Markets
T: +91 22 3090 1661
E: dkanabar@kpmg.com
Arvind Mahajan
Partner and Head
Infrastructure and Government Services
T: +91 22 3090 1740
E: arvindmahajan@kpmg.com
Manish Aggarwal
Partner and Head
Energy and Natural Resources
T: +91 22 3090 2625
E: manishaggarwal@kpmg.com

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