India Inc. would anticipate increased funding and tax policy directives, particularly for the infrastructure sector, as part of directional policy announcements in this year’s interim budget. The power sector is a significant driver of infrastructure development.

India recently shifted from a power deficit to a surplus nation. As a result, everyone needs access to affordable, sustainable, and dependable electricity. Tax incentives and outcome certainty can help draw in investors and developers as the government looks to meet ambitious capacity targets.

Date extension for reduced corporate tax

First, the current 15% corporate tax rate should be extended to a later date (March 2027 or even 2029) for newly established domestic manufacturing companies (including those involved in power generation) that begin manufacturing operations by March 31, 2024.

India still has much-unrealised manufacturing potential, particularly in light of disruptions in global supply chains and MNEs assessing international trade partner diversification (i.e., China Plus One strategy). Expanding the eligibility period for reduced tax rates can elevate India’s standing among global manufacturing hubs in the eyes of investors.

Budget 2024 and the Taxpayer

Make the lower manufacturing tax rate clear.

Businesses are growing more concerned about their carbon footprints as their supply chains become more diverse and global. A greener energy alternative is provided by green hydrogen, particularly for industrial applications with high carbon emissions. The government’s National Green Hydrogen Mission has set an ambitious yearly production capacity of 5 MMT by 2030, and financial benefits in the form of production-linked incentives have already been announced.

Suppose the lower manufacturing tax rate is expressly made clear to apply to green hydrogen and hydrogen derivative businesses, as it did previously for companies that generate electricity. In that case, it will provide income tax certainty and encourage long-term investments.

Power Sector: Carbon certificate taxes with a broad base

India unveiled the Green Credits Programme (GCP) at the most recent COP28 to promote voluntary environmental good deeds. The taxation of alternative forms of credit certificates remains to be determined, even though GCP is not dependent on carbon credits under the Carbon Credit Trading Scheme 2023.

The United Nations Framework on Climate Change (UNFCC) has validated a 10% beneficial tax rate for income arising from the transfer of carbon credits under the current tax law. All other certificates, including Voluntary Emission Reduction (VER) and Renewable Energy Certificates (RECs), are still taxable based on interpretation. Broadening the base of the concessional tax rate to encompass income from all carbon certificates makes sense.

Increase the time horizon for infrastructure projects.

The elected government is expected to unveil a more comprehensive set of fiscal and budgetary policies for the sector later in the year. Still, in the interim, the Interim Budget may decide to extend the deadline for sovereign wealth and pension funds to make qualifying investment investments in the infrastructure sector. The current deadline expires on March 31, 2024. Another term of tax exemption shows promise to perform at least as well as the first one since it brought in direct investments worth about US$ 6.7 billion in 2022 (up from US$ 3.7 billion in 2021).

In the days leading up to the budget announcement, the government has its work cut out for it. The Interim Budget of February 1 should be interpreted as a directional tax policy layout for the next few years as the country prepares for the general elections in a few weeks. When the full-year budget is presented later in the year, the strength of the push for most of these policy changes will depend on the election outcome.