States’ participation crucial for stimulus to work

Finance Minister P. Chidambaram has put the same percentage of custom duty for steamed coal and bituminous coal imports in the Union Budget unveiled on Thursday. The steamed and bituminous coal will have a custom duty of two per cent and on two per cent of Countervailing Duty (CVD).

“Since both kinds of coal are used in thermal power stations, there is rampant misclassification. I propose to equalise the duties on both kinds of coal and levy two per cent customs duty and two per cent CVD,” Chidambaram said in his speech.

“This would increase the cost of power as the present duty on steam coal was only one per cent,” said L.K. Gupta, Managing Director and CEO of Essar Oil.

This comes as a burden for power plants run on imported coal by companies such as Tata Power, Adani and Lanco, among others.

“Thermal power plants using imported coal will therefore see a rise in their power generation cost by at least 5-6 paise per kWH. The ones more dependent on imported coal will see a higher price rise than one based on domestic,” said Debasish Mishra, Senior Director at Deloitte Touche Tohmatsu India Pvt. Ltd.

In case of the Ultra Mega Power Projects (UMPPs), the developer would pass through the increase. This is because as per the ‘Change in law’ clause, any increase in generation cost because of change in law can be passed through. Ultimately, the customers will have to pay more.

Under the Customs Tariff Act, coal has been classified as anthracite, bituminous, coking and steam coal. While steam coal is only used for electricity generation, most bituminous coal is used for sponge iron and as a partial substitute for metallurgical coal.

Earlier it was just one per cent CVD which could be claimed back by the company importing the thermal coal – the coal used in power plants. Hence this Budget there is a levy of two per cent additional customs duty and another one per cent CVD.

“Although CVD can be claimed back, the two per cent levy in customs duty will affect coal prices and power generation costs,” said Mishra.


In addition, the States’ agreement on crucial issues such as coal pool pricing and Discom restructuring would determine Chidambaram’s stimulus for the power sector.

“The fortunes of the power sector are in the hands of States. This is the regulatory structure. Problems such as fuel availability of coal and re-structuring of distribution utilities can be addressed at States’ level,” said Kalpana Jain, Senior Director at Deloitte Touche Tohmatsu India Private Ltd.

The weakest link in the power sector today is the financial health of the power distribution utilities, said Ashok Khurana, Director General of Association of Power Producers (APP).

“The appeal for more State participation in Discom re-structuring would greatly improve Discom financials, and enable the timely off-take and payments of power.”


Chidambaram announced that the ‘eligible date’ for projects in the power sector to avail itself of the benefit under section 80-IA of the Income-tax Act, has been extended from March 31, 2013 to March 31, 2014.

However, the industry hopes that the same benefit may be extended till the end of the 12{+t}{+h} Plan as private sector is envisaged to add a little more than 50 per cent of the installed capacity in the Plan period, said Sunil Wadhwa, Chief Executive Officer, IL&FS Energy Services Company.

(This article was published on February 28, 2013)
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