Budget 2024 Expectations: Energy, Resources and Industrials

Ashwin Jacob, Partner, Industry Leader - Energy, Resources & Industrials

Expectations

Top five asks

Ask #1: Extending concessional corporate tax rate for new manufacturing companies

• The existing 15 percent concessional corporate tax rate has played a key role in attracting investments into India. Under Section 115BAB, new domestic manufacturing companies are eligible for this rate. However, a crucial requirement for these companies is that they must have started manufacturing by 31 March 2024.
• By attracting foreign investments, this provision has been crucial in achieving economic objectives. As a result, the tax administration may extend the regime’s sunset clause for two additional years. This extension will undoubtedly boost India’s economic growth and increase the country’s attractiveness to investors.
• Extending the concessional tax rate would help manufacturing sector investors, who are currently considering or setting up businesses in India, to take advantage of this opportunity.

Ask #2: Providing concessional tax rate on sale of all carbon credits and Renewable Energy Credits (RECs) and, not limited to carbon credits validated by the UN Framework on Climate Change (UNFCC), along with clarification on set-off of losses and unabsorbed depreciation thereof

• Sale of carbon credits validated by the UNFCC is currently eligible for a concessional tax rate under Section 115BBG of the Income Tax Act. This provision does not apply to VERs, RECs, etc.
• Therefore, a concessional tax rate should be offered to all carbon credits, RECs, etc., to encourage the sector, reduce litigation and bring carbon credits at par. Additionally, specific clarification allowing the set-off of losses and unabsorbed depreciation against sale of such carbon credits, VERs and RECs should be provided.

Ask #3: Offering tax incentives for Green Bonds – New section recommended

• Interest income earned by investors in Green Bonds may be considered tax exempt in the hands of investors.
• Additionally, profits earned by investors in Green Bonds from the sale/transfer of such bonds may be treated as tax exempt in the hands of the investors, irrespective of whether such profits/gains are offered to tax in India by investors as business profits or capital gains. It will also indirectly help bond issuers, as they will be able to get a lower borrowing rate.
• To ensure clarity, the definition of Green Bonds may be aligned with the regulatory prescription issued by SEBI for granting such income tax benefits.
• The income tax exemption may be granted to such bond investors, irrespective of whether (i) the bonds are issued under the FDI, FPI or the ECB window, (ii) the bonds are issued by an Indian issuer entity or a financier such as a bank/NBFC/HFC, or (iii) the bonds are listed or unlisted.

Ask #4: Providing guidelines for revenue recognition in case of BOOT/BOT projects/HAM for power, roadways and other ERI projects

• BOT/BOOT/HAM models are commonly used in the ERI sector. Considering the extant ambiguity, specific guidelines regarding the adoption of straight-line method instead of percentage completion method, provided for roadways, power and similar ERI projects, can be used to reduce litigation and increase clarity.
• Additionally, any other specific guidelines/clarifications needed with respect to taxation of income and manner of claiming deduction of expenses.

Ask #5: Offering settlement scheme to resolve past tax disputes arising from differential treaty interpretations

• The Supreme Court’s decision in the Nestle SA case has had wide ramifications on treaty interpretation and various treaty benefits historically availed. A key takeaway from the ruling is the necessity for specific notifications from the tax policy administration under the act, to implement treaty protocols, especially in the context of the Most Favoured Nation (MFN) clause.
• The tax policy administration has started releasing specific guidelines regarding the interpretation of protocols to treaties between India and other countries, which will be implemented in future transactions, promoting clarity and consistency in treaty interpretation.
• However, recognising the need to provide certainty and resolution for present cases where lower rate has already been claimed, the tax policy administration should consider establishing guidelines under a settlement scheme, which may provide one-time window to make voluntary tax payments of differential taxes, without interest or penalty. This initiative would offer relief and certainty to taxpayers, while facilitating efficient tax collection.

Ask #6: Optimising indirect tax cost for the green hydrogen sector

• Currently, indirect tax has become a major cost component for Green Hydrogen (GH) sector in two ways. First, the customs duty paid on the import of solar modules or solar cells used in setting up solar power plants for supplying renewable energy to GH plant. Second, the loss of GST input pertaining to all procurements made by solar/wind power plant in setting up the unit, as the output electricity is exempt.
• The electricity supply by a solar/wind power plant to a GH unit should be considered as deemed export, so that the solar/wind power plant is eligible to claim refund of input GST, which then does not become a cost for the GH unit. Alternatively, the Central Board of Indirect Taxes and Customs (CBIC) should also allow direct refund of the GST paid on all capital goods, inputs and input services used in generating power to solar/wind power plants, with the condition that output electricity is supplied exclusively to a GH unit.
• For customs duty, the CBIC should provide upfront exemption from a 40 percent basic customs duty on the import of solar modules, with specified end-use condition of using such solar power plant for supplying electricity exclusively to a GH project, or provide the benefit of project import with concessional basic customs duty of 7.5 percent on solar power plant or solar power project, being set-up for supply of electricity exclusively to GH project.

Policy recommendations and expected impact/outcome

Recommendation #1
Hydrogen purchase obligation for sectors such as refinery and fertiliser to drive domestic demand. This would provide the necessary fillip to the sector similar to the renewable purchase obligation.

Recommendation #2
Considering the contribution of the aviation sector to carbon emissions, an incentive programme for production of sustainable aviation fuel could be considered by the government. This would help reduce emissions from the aviation sector.

Recommendation #3
Oil Industry Development (OID) cess and Special Additional Excise Duty (SAED) may be revised as it renders domestic crude at a significant disadvantage to imported crude oil.