It’s that time of year again when the country eagerly awaits the announcements made in the Union’s budget. The 2022 budget is all the more important as the world, including India, tries to cope with the Covid-19 pandemic and its aftermath. Furthermore, the 2022 budget gains momentum as India embarks on the path to becoming a $5 trillion economy by 2025, a goal for which this budget will lay the foundation and the roadmap. .
The renewable energy sector is one of the main contributors to infrastructure development and is a theme for the future with a focus on electric vehicles, solar cells, green hydrogen, etc. carbon emitter by 2070 and announced enhanced targets for the deployment of renewable energy and the reduction of carbon emissions.
The government has put in place various initiatives to boost the sector, such as the introduction of new rules for the purchase and consumption of green energy, plans to undertake Phase II of the rooftop solar programme, making calls tenders for the establishment of solar manufacturing units under the production-linked incentive (“PLI”) scheme. In the 2021 budget, an additional capital injection of Rs 10 billion and Rs 15 billion was made in Solar Energy Corporation of India and Indian Renewable Energy Development Agency respectively, to boost the renewable energy sector.
According to available data, India’s renewable energy capacity exceeded 100 gigawatts (“GW”) in 2021. India is targeting around 450 GW of installed renewable energy capacity by 2030 and around 60% of this should come from solar energy. With India’s commitments at CoP26 and given the focus on capacity expansion, some tax policy reforms listed below can be considered:
- Consolidated group tax regime – One of the main industry expectations from the perspective of the Income Tax Act 1961 (“Income Tax Act”) is the introduction of a consolidated group. Currently, in the energy and road sector, players are required to have multiple special purpose vehicles (‘SPV’) due to regulatory constraints. This results in an increased compliance burden and the tax loss of one entity cannot be offset by the profits of another, thus leading to tax leakage at the group level. The introduction of a group tax regime will make it possible to offset these tax losses, thus also improving the group’s cash flow.
- Deduction for capital-intensive projects – The Income Tax Act provides a deduction for all capital expenditures incurred in specified businesses. While various other businesses are included within the scope of Section 35AD, the inclusion of energy projects within the scope of Section 35AD will provide a much needed boost to the sector. The establishment and operation of renewable power plants is a capital-intensive project and hence this will drive the capital expenditures that are required in the case of such projects.
- Thin Capitalization Standards – The government, in line with the BEPS 4 action plan, has introduced the concept of thin capitalization standards. Pursuant to this prescribed provision, there are restrictions on claiming interest or similar expenses in excess of 30% of earnings before interest, taxes, depreciation and amortization (“EBITDA”). Infrastructure projects, including power projects, have long gestation periods and therefore a group is usually financed through a debt structure. Therefore, since it is a highly indebted sector which is justified due to business and commercial requirements, limiting the interest deduction to 30% of EBITDA leads to increased tax costs and problems. of cash flow. As a result, the government should consider increasing the limit to 30%, which will result in tax cost savings and hence cash flow optimization.
As stated above, the introduction/modification of the provisions will have a huge impact on the renewable energy sector and in turn will help the government to make it easier to do business. Hopefully, in addition to our wish list and expectations, various initiatives will be introduced by Budget 2022 to boost India’s economy and also help fulfill India’s visionary commitments at CoP26.
Jimit Devani is a partner and Parth Shah is a director at Deloitte Haskins and Sells LLP. The opinions expressed are those of the authors.