Direct Tax Incentives to Power Sector in India: A Case Study

Abstract

The article examines in detail, as a test case, the impact of direct tax incentives on the power sector in India. The Indian power sector is regulated and has been the greatest beneficiary of the various tax incentives. Direct taxes foregone to the power companies alone are estimated to be ₹700,000 million during the fiscal year 2006–2007 to 2014–2015. The power companies in India have enjoyed profit-linked tax holidays (Section 80 IA), accelerated depreciation (Section 32), easy accessibility of external commercial borrowings and a low withholding tax of 5 per cent on overseas borrowing. The study does a ‘three-way examination’ of the impact of the tax incentives by examining: (i) macroeconomic indicators, (ii) firm level data and (iii) micro-indicators. The findings are that (i) there is no evidence of any real benefits accruing to the economy either in the form of increased foreign direct investment (FDI) flows to the sector, gross fixed capital formation (GFCF) in the sector or commensurate growth in electricity sector vis-à-vis other sectors of the economy or in the economy as a whole due to the several decades of direct tax incentives to the power sector in India; (ii) clearly, the loss of revenue from the tax incentives is real and substantial and (iii) the financial ratios of the three power companies (National Thermal Power Corporation [NTPC], Tata Power and Reliance Energy) indicate that they are capable of raising resources on their own and the theory of market failure may not apply to them.