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TRANSITION FROM ACCELERATED DEPRECIATION TO GBI | 1
TRANSITION FROM ACCELERATED DEPRECIATION
TO GENERATION BASED INCENTIVE

IPPAI-MNRE Conference 2009

December 17, 2009 | Hotel Imperial | New Delhi

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Gokul Chaudhri | Partner | BMR Advisors

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 DISCLAIMER

This presentation provides general information existing at the time of

preparation. The presentation is meant for general guidance and no
responsibility for loss arising to any person acting or refraining from acting
as a result of any material contained in this publication will be accepted by
BMR Advisors. It is recommended that professional advice be taken
based on the specific facts and circumstances. This presentation does not
substitute the need to refer to the original pronouncements

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TRANSITION FROM ACCELERATED DEPRECIATION TO GBI | 3
CONTENTS
 WIND ENERGY
 A perspective
 Direct tax incentives
 Indirect tax incentives
 TRANSITION FROM ACCELERATED
DEPRECIATION TO GENERATION BASED
INCENTIVE (GBI)
 A pilot scheme
 Disbursement mechanism
 Tax issues
 Concluding remarks

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WIND ENERGY – A
PERSPECTIVE

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WIND ENERGY – A PERSPECTIVE
Overview
Currently, India occupies fifth position globally with an installed capacity ~ 10,891 MW (as on
October 31, 2009)
Wind energy share in India’s total installed power generation capacity ~ 7 percent
Benefits of wind power
Zero cost of fuel and low cost of operation and maintenance
Short gestation period
Clean energy with no adverse environmental effects
Opportunity landscape
India’s wind power potential is estimated at 48,561 MW
Capacity addition programmes
 11th Plan ~ 10,500 MW
 Cumulative 12th & 13th Plan ~ 22,500 MW

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Incentives
Several fiscal concessions / exemptions are available to independent power producers (IPPs) in
the wind sector – some of these are discussed in subsequent slides

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INCENTIVES FOR WIND ENERGY – DIRECT TAX
10 year tax holiday in a block of 15 years for:
 Generation or generation and distribution of power
 Transmission or distribution of power by laying new distribution lines
Tax holiday available to an “undertaking” which begins to generate power or starts
transmission or distribution by laying a network of new transmission / distribution lines
before March 31, 2011
Accelerated depreciation (80 to 100 percent) on Written Down Value (WDV) basis for
energy saving and renewable energy devices such as wind mills, solar cookers etc
Additional depreciation of 20 percent
One time election to power generating companies to claim depreciation on straight-
line basis (SLM) available

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INCENTIVES FOR WIND ENERGY – INDIRECT TAX
Thrust of fiscal incentives for mega power projects (includes hydro power projects of
specified capacities); eligible for complete customs and excise duty exemptions
Power projects, renewable or otherwise, not qualifying as mega power projects
eligible for concessional rate of customs duty at 18.62 percent (as against 21.52
percent)
Concessional rates for excise (Nil rate of duty as against 8 percent) and customs duty
(Nil to 5 percent of BCD as against 7.5 percent / 10 percent) available for specific
renewable sources of energy like wind, solar, biomass etc
Renewable energy devices typically attract a lower VAT rate of 4 percent
Deemed export benefits available; input side costs reduced by availing deemed
export benefits like Advance Authorization or Deemed Export Drawback

GBI instead of accelerated depreciation examined in the subsequent slides

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TRANSITION FROM
ACCELERATED
DEPRECIATION TO GBI

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TRANSITION FROM DEPRECIATION TO GBI
India occupies fifth position globally in the installed capacity, however the power
generated is low [installed wind power capacity (10,891 MW) of 22.42 percent of the
total potential (48,561 MW)]
Historically, the wind energy sector attracted investments under the accelerated
depreciation route – this resulted in a marginal benefit due to the offsetting impact of
accelerated depreciation on tax holiday
Thus, the benefit of accelerated depreciation route losing its importance
Gradually, the focus is on incentivizing generation of power from renewable energy
rather than on building capacities and creation of capital assets
Considering the need of power generation and objectives of investors, a proposal to
provide a choice between accelerated depreciation benefit and GBI to IPPs has been
mooted
For this, the Government has announced the scheme of GBI for wind energy

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GBI – A PILOT SCHEME
GBI for grid connected wind power projects which are
certified by concerned utility announced by Ministry of
New and Renewable Energy (MNRE)
GBI of Rs 0.50 per unit (kwh) for a period of 10 years
to the eligible project promoters
Scheme applicable to wind power projects
commissioned for sale of power to the grid; not
applicable for capacities set up for captive
consumption, third party sale etc
Projects not to claim benefit of accelerated
depreciation under the Income tax Act (IT Act)
Projects to have minimum installed capacity of 5 MW
and to be installed at project sites approved by the
Center for Wind Energy Technology (C-WET)
GBI to encourage actual energy generation rather

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than capacity addition only, resulting in optimum
utilization of wind resource

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GBI – DISBURSEMENT MECHANISM
GBI would be disbursed by Indian Renewable Energy Development Agency (IREDA)
through e-payment on a half yearly basis
This incentive is over and above the tariff approved by the State Electricity Regulatory
Commissions
The distributor / utility will provide a periodical certificate to the IPP regarding the net
electricity fed to the grid
Incentives shall be disbursed by IREDA, based on the grid synchronization letter and
certified information about the net electricity fed to the grid from the wind power project
Project developer will have to submit a self declaration about non-claiming of
accelerated depreciation to IREDA
Copy of income tax return at the end of each financial year to be submitted with IREDA
to establish that the benefit of accelerated depreciation has not been claimed

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GBI – ISSUES
Depreciation
Whether accelerated depreciation means the higher rate on WDV basis in comparison
to SLM basis?
In case the SLM rates are not to be considered for this purpose -
 Whether accelerated depreciation means the higher rate of 80 percent on wind
mills as compared to the general rate of 15 percent?
 Whether accelerated depreciation also includes additional depreciation of 20
percent?
 In case accelerated depreciation refers to higher rate of 80 percent available to
wind mills and / or additional depreciation of 20 percent as against the general rate
of 15 percent – would the claim of depreciation at general rate be correct under the
IT Act?

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GBI – ISSUES (CONT)
Applicability in case of two undertakings
In a situation wherein there are two undertakings – one utilizing its capacities for third
party and captive consumption and the other one utilizing its capacities towards grid, the
following issues arise:
 Whether the GBI is available for the undertaking dedicated to the grid or is it
connected to the entity?
 Whether there can be a different basis for claim for depreciation for the different
undertakings within the company that is to say, non-accelerated basis for the
eligible undertaking and accelerated depreciation for the non-eligible undertakings?
Direct tax Code (DTC) Bill
• The DTC proposes a shift from profit linked incentives to investment linked incentive for
generation / distribution of power - applicability and impact?

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CONCLUDING REMARKS
The policy for wind energy is continuously evolving
Phase I ~ Accelerated depreciation
 Under Phase I, investor have only one option, ie availing the accelerated
depreciation benefit – useful for diversified profit making businesses
Phase II ~ GBI
 Under Phase II, the investor has an option to avail the benefit of either
accelerated depreciation or GBI – Useful for IPP investors
Phase III ~ CERC tariff regulations for wind energy
 Under Phase III, the investor has an option to either follow the generic CERC
tariff norms or seek an approval for a project specific tariff
 The new regulations, provide an option to the developer to avail the benefit of
either accelerated depreciation or GBI for determining the tariff – Both the
benefits to be subsumed in the tariff

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The above permutations are likely to have a significant bearing on the IRR of a
project

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 CONCLUDING REMARKS (CONT)
IPPs with diversified
Assumptions IPPs CERC Norms
businesses
IPPs with
Options AD GBI AD GBI IPPs diversified
businesses
More
~ 16.5% to ~21% to
IRR (illustrative) than May not be suitable ~ 18%
17% 22%
100%

 For independent IPPs, the
AD resulted in marginal
benefit since the tax
holiday used to offset
Comments such benefit
 However, under GBI, IRR
of independent IPPs
improves significantly
 While a project has equity
investment of 30% to 35% of
total project cost, the
accelerated depreciation on
entire project cost provides tax
shield against profits – This
results in high IRRs and
accordingly, such players would
not opt for GBI
• While CERC regulations
would mean higher post tax
return, however, since any
other benefits (AD or GBI)
are proposed to be
subsumed within tariff, the
projected returns could be
lower as compared to the
present scenario

Other key assumptions:

 State – Karnataka

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 PLF – 30 percent
 Debt: Equity – 70: 30
 In case of GBI, tax depreciation @ 15 percent on WDV basis
 In case of diversified businesses, other businesses are large, profitable and are able to set-off the accumulated
depreciation of wind business

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