1. What is depreciation?
Depreciation is the loss in the value of asset due to usage, wear & tear, technological advancement and passage of time. Business units consider depreciation an expense and charge the same in their Profit and Loss Account. For example, if you buy an asset of Rs. 300 and decide that its value will decrease by Rs. 50 every year, you will charge Rs. 50 as an expense in your P&L Account. At the same time, tax is paid on profits (which are calculated after deducting depreciation). So, if your profits before depreciation were Rs. 500, you need to pay tax on Rs. 450 only. So, you will have to pay lesser taxes due to depreciation. So, depreciation results in tax-savings. At the same time, it must be noted that depreciation is only a notional expense; it is not paid in cash (as the loss in the value of an asset is a non-cash expense). So, depreciation is a non-cash expense.
Highlights of the Union Budget 2016 for Energy, Oil and Mineral sectors-
- The allocation to New & Renewable Energy ministry is now Rs. 5,036 crores. This is an almost 19 times increase from the revised estimates of this year, which was Rs. 262 crores. However, actual expenditure for 2014-15 was Rs. 515 crores.
- Depreciation benefits for Wind-energy plants will be reduced from 80% to 40%, beginning from 1st April 2017.
- Clean Energy Cess on coal, lignite and peat will now be called “Clean Environment Cess” and the same is doubled to Rs. 400 per tonne.
- All villages in the country will be electrified by 1st May 2018. Rs. 8,500 crores has been allocated to Deendayal Upadhayaya Gram Jyoti Yojana and Integrated Power Development Schemes for this purpose.
- Government will provide more freedom to companies engaged in exploration of Natural Gas. It is also considering allowing market prices for natural gas (Prices are currently fixed by a formula). The free market prices will have an upper-limit linked to the cost of alternative fuels.
- Currently, Cess on oil production is being charged at Rs. 4,500 per tonne. From 2016-17, it will be charged at 20% of the crude price.
- Government is making long-term plans for investment in nuclear power generation.
- The massive increase in the allocation to the New and Renewable energy ministry is great news as renewable and alternative fuels are the future. We must cut down our usage of coal, oil and other fossil fuels. However, it is confounding to know that the revised estimates of this year were almost half of the actual expenditure in 2014-15. Clearly, the approach of ministry is pathetic and its failure in spending money this year, raises big questions about the budget allocated for 2016-17. The ministry must ensure that the allocated sum is put to use in the most effective and efficient manner.
- Reducing depreciation benefits for wind-energy plants is also a harmful decision. This will dampen the demand from the companies that enter this sector primarily due to the tax benefits. Wind-energy is the cheapest and cleanest alternative source of energy and India has huge potential in this field. The govt should encourage this sector and provide a big boost to the companies operating in this sector.
- Increasing cess on coal is as per India’s commitments in the Paris Climate Summit. However, the increased cess on coal will increase prices of power by around 20 paise per unit. It will also increase costs of other dependent industries like steel industry. This will also increase cement prices by Rs. 18 to 19 per tonne. Though, overall announcements for the housing, roads and irrigation sector can have far-reaching benefits for the cement industry.
- Increasing coal cess will also make thermal energy more expensive, thus decreasing the gap between thermal energy and solar power. This should make green energy projects more viable.
- The target for electrification is encouraging but govt must also focus on increasing power supply to the areas which are already electrified. Providing 2 hours of electricity per day is not electrification, according to me.
- The proposal to allow market prices to natural gas exploration companies is very important. It must be accepted and implemented. Reliance Industries and ONGC have been demanding this for a long time and it will be a big relief to them as it will promote development of deep-sea oil fields that need bug investments.
- Change in method of charging Cess on oil production is a big relief to the oil industry which is suffering under crashing crude prices. This will give a major boost to ONGC and Cairn India and they will receive an immediate post-tax benefit of $3 per barrel.
- Focus towards nuclear energy is a welcome step. Govt should make this a priority.
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