Outcome of APP Initiatives

 Since the 18th Jan 2012 meeting with the Prime Minister and subsequent follow up meetings with the Principal Secretary to the PMO and other senior Government officials, many positive actions have been initiated as highlighted below:

Customs Duty Exemption for Import of Facilities set up outside the designated Boundary of Ultra-Mega/ Mega Power Projects

Hon. Finance Minister had mentioned in his Budget speech for AY 2011-12 about the benefit of exemption under Customs being available for facilities both inside and also outside the Ultra-Mega/Mega Power Plant’s designated boundary. However, for facilities outside the plant boundary, the benefit of exemption from whole of Customs Duty was being disallowed due to want of explanation / clarification under the main Notification No. 12/2012-Central Excise (S. Nos. 337&338) dated 17-03-2012. In the context, APP requested Ministry of Finance to issue requisite explanation / clarification under Customs for grant of benefit of exemption from whole of Customs Duty for aforesaid facilities.

Heeding APP’s request, CBEC issued a circular vide ref F.No.354/94/2011 – TRU dated 23-08-2013 clarifying that goods required for development of facilities such as ash disposal system including ash dyke, water intake including treatment and storage facilities and coal transport facilities required for ultra-mega/ mega power projects are eligible for customs duty exemption, notwithstanding the fact that such facilities are set up inside or outside the power plant’s designated boundary.

Signing of FSA with Coal India Ltd

Undoubtedly, the major development has been the directive to CIL to sign FSAs, and the directive to import coal if needed to fulfill FSA commitments. After the 18th Jan 2012 meeting with the Prime Minister, the PMO instructed Coal India Limited to sign FSAs with power plants that have entered into long-term PPAs with power distribution companies and have been commissioned/ would get commissioned on or before 31st March 2015. This was followed up with a Presidential Directive after CIL reluctance to sign the FSAs. The FSAs are to be signed for full quantity of coal mentioned in the Letters of Assurance (LoAs) for a period of 20 years with trigger level of 80% for levy of disincentive and 90% for levy of incentive. In case of any shortfall in fulfilling its commitment under the FSAs from its own production, Coal India Limited will arrange for supply of coal through imports and additional cost burden will be shared through a price pooling mechanism. The details of the price pooling mechanism for imported coal are currently under discussion.

Subsequently, APP made representations to the authorities regarding issues which needed further clarifications with respect to the signing of FSAs. While the most important aspect of pricing impact of deficit coal required to meet the normative availability requirement of 85% is still unresolved, positive action has taken place on the following:

Requirement of PPA for signing of FSA – While the PMO instruction and the subsequent Presidential Directive had made the signing of FSA contingent upon the signing of long-term PPA by the power plant developer, APP had requested for relaxation in this provision considering the present market situation where long term bidding opportunities are limited. APP had suggested that signing of FSAs be allowed for the power plants expected to be commissioned by 2015, even in the absence of PPA and that supply of coal under the FSA may be linked to the signing of PPA. Further, APP had also requested for medium term PPAs to be considered for supply of coal under FSA. The authorities have agreed to both the suggestions.

Accounting for Auxiliary Consumption -  The Presidential Directive asked CIL to sign FSAs for the capacity tied up under long term PPAs. However, under the provision of standard competitive bidding PPAs, the capacity tied up for supply of power is net of auxiliary consumption and transmission losses. In order to supply a certain MW capacity under a Case I/Case II PPA, the Seller needs to generate the contracted capacity in MW plus the auxiliary consumption, and therefore APP requested the Ministry of Coal and Ministry of Power to take the same into consideration. Subsequently the authorities have agreed that for PPAs which have been signed for net delivered capacity, their PPA capacity needs to be grossed up by 10% for accounting transmission losses and auxiliary consumption. 

Coal Mix Optimization

Coal linkages from CIL are granted depending on the location of the power projects – 100% of normative requirement for hinterland projects and 70% for coastal projects. Considering the deficit domestic coal availability situation, the hinterland projects have no choice but to rely on imported coal to bride the fuel deficit. The resultant scenario of imported coal being transported to far away hinterland locations and domestic coal being transported long distances from the mines to coastal locations leads to loading of significant transportation and wastage costs. APP had suggested a mechanism for coal mix optimization – allowing a company with projects at multiple locations to transfer/swap allocated domestic coal linkages amongst its own plants. Heeding APP’s request, Ministry of Power has recommended to Ministry of Coal to allow optimization of coal linkages between multiple projects of any particular developer.

Budget package

Many of APP’s requests were taken into account in the Union Budget 2012 which announced a host of measures to bolster the power sector.


S. No. Item APP Proposal Budget Declaration
1. Extension of sunset clause of 80IA Extension of sunset clause of Section 80-IA of Income Tax Act till FY17 extend the terminal date for a further period of one year, i.e., up to 31st March, 2013
2. Relaxation of Withholding tax on ECB Withholding tax on interest payments on ECBs to be removed or atleast reduced to 5% from the existing 10-20% rate. the rate of withholding tax on interest payments on external commercial borrowings is proposed to be reduced from 20 per cent to 5 per cent for three years.
3. Removal of cascading effect of Dividend Distribution Tax (DDT) DDT levied on both dividends from subsidiary and parent company leading to double taxation in case any company receives, during the year, any dividend from any subsidiary and such subsidiary has paid DDT as payable on such dividend, then, dividend distributed by the holding company in the same year, to that extent, shall not be subject to Dividend Distribution Tax under section 115-O of the Act
4. Exemption from customs/excise duty for coal mining equipment Coal mining equipment for integrated power and coal mining projects should be exempt from customs/excise duty Full exemption from basic customs duty is being extended to coal mining projects.
5. Exemption from customs/excise duty for coal/natural gas/ LNG Coal/natural gas/LNG to be exempt from customs/excise duty

Steam coal is being fully exempted from basic customs duty. CVD is also being reduced from 5% to 1% on such coal. This dispensation would be valid upto 31.3.2014.

Natural gas/Liquified Natural Gas imported for power generation by a power generation company is being fully exempted from basic customs duty.

6. Extension of Mega Power benefits to 12th Plan projects Continue Mega Power benefits i.e. customs/excise exemption on equipment No declaration
7. Exemption from customs/excise duty for construction material used for mega power projects Exempt customs/excise duty for construction material used for mega power projects No declaration
8. Exclusion of power from 'negative list' for service tax Exclusion of power from 'negative list' for service tax Transmission or distribution of electricity by an electricity transmission or distribution utility included in negative list
9. Exemption from customs/excise duty for solar projects No proposal Brass scrap, wood in the rough, dredgers and equipments for setting up of solar thermal projects are being fully exempted from SAD
10. Initial depreciation in first year No proposal Assessee engaged in the business of generation or generation and distribution of power shall also be allowed initial depreciation at the rate of 20% of actual cost of new machinery or plant (other than ships and aircraft) acquired and installed in a previous year.


Bank Guarantee in place of Fixed Deposit

Projects with provisional mega power status were being asked to provide Fixed Deposit in lieu of customs while importing project equipment. This imposed a huge cash strain on projects since ~25% of equipment cost is blocked as FD for a period of three years. Consequently, the Govt. of India, Ministry of Finance, Department of Revenue notifications bearing number 43/2012- Customs and 28/2012 – Central Excise, both dated 27.6.2012 were issued whereby in place of words “Fixed Deposit Receipts” the words “Fixed Deposit Receipt or Bank Guarantee” were substituted in the respective earlier notifications issued by Customs and Central Excise. This indeed is a welcome step that helps mitigate cash flow related constraints of the developers to a considerable extent.

Use of MDO (Mine Developer and Operator) to augment production from CIL mines

Planning Commission has asked Ministry of Coal to expeditiously appoint private miners to augment to production from CIL mines. Ministry of Coal is presently preparing model concession agreements for the MDO projects.

Setting up of Coal Regulatory Body

It has been a longstanding request of APP for setting up of a coal regulatory body for better transparency in coal allocation and pricing. A GoM under Finance Minister, Shri P. Chidambaram has been appointed for consideration of the Bill and it is expected to be finalized and sent to the Cabinet for approval shortly.

Measures to improve Discom health

It is an encouraging development that several utilities are in process of revising their tariff in the recent past. Even before commencement of FY13, six Discoms (Tamil Nadu, Madhya Pradesh, Orissa, Bihar, Tripura and Andhra Pradesh, which represent 28% of power consumption) have revised tariff by 7 – 37%. Discoms are finally taking initiatives to address their cash flow issues. A rating mechanism recently introduced by the Ministry of Power for the Discoms would help in providing transparency to the banks / FIs on their health, and enable them appraise these utilities on the basis of the reforms initiated. APP has been repeatedly asking for milestone linked financial support for the distribution utilities and a debt restructuring package for the Distribution utilities has been approved by the Cabinet on 24th Sep 2012, which can be availed by the States as long as they commit to operational performance improvements such as loss reduction and fiscal improvements such as tariff increases.

Diversion of E-auction Coal

Keeping in mind the domestic coal shortage for power plants in the country, APP had requested for diversion of e-auction coal to the power sector at notified prices. Ministry of Coal has confirmed that Coal India Ltd would reduce e-auction quantity from 10% to 7% progressively by end of the 12th Plan.

Change in Coal grading and pricing mechanism

CIL had announced an intention to shift from Useful Heat Value (UHV) system of grading of coal to a Gross Calorific Value (GCV) based grading system from 1st Jan 2012. This led to strong opposition from APP and other stakeholders since the GCV pattern of grading of coal, though internationally practiced, calls for certain preconditions which are not in place as of today. APP requested for deferral of the proposal till a thorough consultative process with all stakeholders was completed. Consequently, the proposal was deferred.

Recommendation for Forest Clearances for Major Coal Blocks by GOM on Coal

The GOM on coal has recommended Forest clearance for major coal blocks affected by No-Go notification (Chhatrasal and Mahan) and provided a list of mitigation measures to minimize the environmental impact. However, the actual clearance by MoEF still remains pending in these cases.

Further, as per APP's request, parallel processing of Environmental and Forest clearances for both coal block projects and end use projects such as power plants has now been permitted.