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RENEWABLE ENERGY MR ADWIT KASHYAP; RESEARCH ASSOCIATE, ENERGY ENVIRONMENT TECHNOLOGY DEVELOPMENT (EETD) DIVISION & MR SAAHIL M PAREKH; RESEARCH ASSOCIATE, GREEN GROWTH AND RESOURCE EFFICIENCY DIVISION Improving the effectiveness of the Accelerated Depreciation incentive for the Renewable Energy sector Allowing the pass-through of the AD incentive from the SPV to the parent company will allow the parent company to reduce its near-term tax obligations on profits from its other business operations. The absence of such a pass-through creates significant barriers to entry in the sector. Renewable energy sources constitute 13.2% of the total installed capacity in India. Out of this, solar installations account for 12.2% of renewable installed capacity. Wind installations constitute 64.7%. The government announced in the Budget of 2015 their aim to ramp up solar and wind power capacity from 4,685 MW and 24,759 MW in 2015 to 100 GW and 60 GW by 2022. Achieving this target will require a considerable amount of reform and policy push. Among various policy incentives to ensure rapid deployment of renewable energy projects, provision of accelerated depreciation (AD) has been a significant driver in both solar and wind power sectors. In fact, when the government withdrew the AD incentive for the wind power sector in 2012, annual capacity addition took a major hit, declining from 3200 MW in 2011-12 to 1700 MW in 2012-13. When the government reinstated the incentive later, capacity addition increased once more. Specifically for the solar energy sector, however, accelerated depreciation incentives provided by the government, in their current form, are hardly beneficial. With some tweaking, they can be made more useful. The Accelerated Depreciation incentive is a fiscal incentive measure, offered by the Government of India under Section 32 of the Income Tax Act 1961, for equity investors in the renewable energy market. Accelerated depreciation is the allowance of deduction for declines in the value of an asset at higher rates in the earlier years than are expected to occur in practice. It does not increase the nominal entitlement to depreciation for tax exemption purposes. It simply allows more depreciation in the earlier years, and thus more tax exemption, and allows deferral of tax burden to the later years. The popular modus operandi in the solar power sector is for parent companies to set up Special Purpose Vehicles (SPVs) to own and operate the solar power project. This insulates the parent company from financial risk. The accelerated depreciation incentive offered by the government can be availed by the SPVs. However, the benefit of accelerated depreciation cannot be passed through to the parent company. This creates a problem because solar power projects have high capital costs and long payback periods and there are very little, if any, profits in the first few years. As stated earlier, the benefit of accelerated depreciation really matters in the initial years, and because the SPVs cannot report taxable profits, most of them cannot avail of the benefit. This impedes the effectiveness of the accelerated depreciation incentive. Allowing the pass-through of the AD incentive from the SPV to the parent company will allow the parent company to reduce its near-term tax obligations on profits from its other business operations. The absence of such a pass-through creates significant barriers to entry in the sector. A few back-of-the-envelope calculations provide a useful estimate of the potential of such a reform. The Income Tax Department collected nearly Rs. 7,00,000 crores in direct taxes in FY 2014-15, of which about 30%, or approximately Rs. 2,10,000 crores, was corporate tax. Even if only 5% of this amount was from corporations interested in investing in solar power, this amounts to Rs. 21,000 crores in taxes that are being paid by potentially interested companies. Supposing they want to eliminate their entire tax obligations, and considering that tax exemption benefit from accelerated depreciation amounts to approximately 34% of project cost, the potential for impact of enabling accelerated depreciation pass-through can be estimated at up to 5GW of solar capacity. While these are simple estimates of the opportunity to augment renewable installed capacity through this reform, a rigorous study to examine the benefits of AD pass-through will be worthwhile. The Ministry of New and Renewable Energy should perhaps look into the possibility of such an idea, drawing inspiration from initiatives in the export-import sector, in which the government recently allowed tradability of duty credits, enabling monetization of the duty credits accumulated with some market participants energetica INDIA · MAR | APR16 39


energetica-india-56
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