Industry dismay as tax loophole closes

INDIA: A tax incentive credited with propelling India's wind-power sector since its inception in the 1970s has been removed, leading to predictions of a major drop in installations.

The incentive, known as accelerated depreciation, is an accounting method that has allowed companies to reduce their tax burden by front-loading depreciation in their books by up to 80% during the early years of a project's life.

However, from 1 April, all wind farms installed can only claim the standard depreciation of 15% a year, which all businesses can claim.

The change - announced at the end of March - was expected, as the government had made clear its preference for generation-based incentives (GBI) when it announced the GBI framework in December 2009. Accelerated depreciation has increasingly been seen as attracting non-serious players, who often had other businesses and only got into wind-power production to claim tax rebates.

ICRA, an associate of ratings agency Moody's, estimates that discontinuation of accelerated depreciation is likely to result in a decline in added capacity of 800MW-1GW in the near term. It says the 3GW-plus capacity addition during 2011-12 was driven largely by independent power producers (IPPs). IPPs such as Green Infra, Renew Power and Mytra have not opposed withdrawal of the benefit.

Gradual decline

While the share of those claiming the benefit - mainly retail consumers and financial investors - declined gradually from 70-75% to 40-45% in 2012, the amount was still sizeable, ICRA said.

Nonetheless, ICRA believes the long-term prospects for wind energy remain intact. IPPs would continue to drive demand due to the introduction of renewable-energy certificates (RECs) and other factors such as the increasing cost-competitiveness of wind energy compared to conventional sources.

However, other sections of the wind-power industry have reacted with shock. The Indian Wind Turbine Manufacturers Association (IWTMA) had been lobbying for the benefit to be extended. It points out that the generation-based incentive is also likely to be discontinued if a long-awaited move to a new tax regime, the Direct Tax Code, comes into effect from 1 April next year. Ramesh Kymal, chairman and managing director of Spanish firm Gamesa's Indian operations, who is also IWTMA chairman, called the move "a major setback".

"With the economic slowdown, increase in interest rates and escalation in input costs, accelerated depreciation was the major motivating factor in investment decisions," Kymal said.

He added that wind power is crucial to help India reach its goal of generating 15% of its energy use from renewable sources by 2020, which is the target set under the National Action Plan on Climate Change.

Of the 11% share in India's installed power capacity that is claimed by renewable sources, wind power is by far the most significant. For the first time, the sector added more than 3GW of capacity in 2011-12, taking total capacity beyond 15GW. In comparison, solar power accounts for a little over 500MW of grid-connected capacity.

"The withdrawal of this benefit will see a major drop in installation and inability to maintain the growth rate, which will send a wrong message nationally and internationally," Kymal said, adding that the wind-power industry will lobby the New and Renewable Energy Ministry to intervene to have the benefit restituted.

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