Indian Govt May Levy Import Duty on Power Equipment for Mega Projects

India is reviving a plan to scrap its mega power plant policy, imposing a 5% customs duty on the import of equipment that goes into thermal projects that will generate at least 1,000 megawatts (MW).

The government's move is believed to be prompted by a desire to prevent the import of Chinese equipment.

To be sure, the move needs to be cleared by the cabinet and the rule will apply only to new projects with companies that have already placed orders with Chinese equipment makers being exempt.

"Tariff or custom duty exemption is only applicable for mega power projects. If this distinction is done away with, there is no difference between mega or non-mega. The imported equipment will be subjected to a 5% customs duty, 10% countervailing duty and special additional duty of 4%. There will be no distinction. Everyone will have to pay the same duty," said a top power ministry official who did not want to be identified.

The mega power project status allows fiscal benefits to developers of thermal power plants of at least 1,000MW capacity, including a tax holiday for 10 years and a waiver from customs duty on equipment imports. Developers of smaller projects pay a 5% import duty on power equipment. The "mega" status is also available to hydropower projects having a threshold capacity of 500MW. In Jammu and Kashmir and the North-East, the threshold capacities are 700MW for thermal projects and 350MW for hydropower.

The power ministry is expected to take up the issue with the Union cabinet soon. "Any policy change will have to be prospective," added the power ministry official.

India's move to curb Chinese power equipment imports comes at a time when the two countries have been discussing ways to double bilateral trade to $100 billion (Rs. 4.9 trillion today) by 2015 and how to plug a yawning trade gap in China's favour. Bharat Heavy Electricals Ltd (Bhel) and Larsen and Toubro Ltd (L&T) have been lobbying with the government to limit Chinese competition.

A second government official, who also did not want to be identified, said the proposal has been in the works for some time, aimed at creating a level playing field for domestic equipment makers. The power ministry was not in favour of such a move until after the start of the 12th Plan (2012-17). A panel of secretaries had earlier decided to impose these duties. Planning Commission member Arun Maira had also recommended a 14% import duty on power generation equipment to strike a balance between protecting local manufacturers and the need to import equipment to boost power production, Mint reported on 10 February 2010.

Power generation equipment manufacturers having a manufacturing base in India—Bhel, Doosan Heavy Industries and Construction Co. Ltd, and the joint ventures between L&T and Mitsubishi Heavy Industries Ltd; Toshiba Corp. of Japan and the JSW Group; Ansaldo Caldaie SpA of Italy and Gammon India Ltd; Alstom SA of France and Bharat Forge Ltd; BGR Energy Systems Ltd and Hitachi Power Europe GmbH, and Thermax Ltd and Babcock and Wilcox Co.—will benefit from such a move.

A top Bhel executive, who did not want to identified, said: "We have been asking for it for so long. Such a move will benefit us and all the joint ventures that have been set up."

The chief executive of one of the joint ventures mentioned above, who spoke on condition of anonymity, added: "It will curb imports."

Bhel has been facing competition from Chinese power generation equipment manufacturers such as Shandong Electric Power Construction Corp., Shanghai Electric Group Co. Ltd, Dongfang Electric Corp. Ltd and Harbin Power Equipment Co. Ltd, both in the domestic and overseas markets. Equipment makers, much like other exporters from China, benefit from low interest rates and an undervalued currency.

Power utilities have placed orders for overseas equipment largely because of the inability of local manufacturers to meet growing demand. Chinese equipment is also relatively cheaper. While the per-MW cost of completion of a thermal power project using Chinese equipment is around Rs. 3.5-4 crore, it works out to Rs. 4.5-5 crore for projects using other equipment.