India will shortly impose a 5% import duty on power generation equipment in a move that will benefit domestic firms including Bharat Heavy Electricals Ltd (Bhel) and Larsen and Toubro Ltd (L&T) that have been lobbying with the government to limit imports.

In addition, the government will also impose a 10% countervailing duty (CVD), a sort of equalization levy to make up for the excise on local products, and 4% special additional duty (SAD), taking the total to 19%, according to two government officials aware of the development who requested anonymity.

That duty structure will apply only to the so-called mega projects, or those generating at least 1,000 megawatts (MW).

For non-mega projects, the overall duty will increase to 21%5% import duty, 10% CVD, 2% excise duty and 4% SAD.

The contentious move, which has been in the works since 2010, will affect Chinese power-generation equipment firms such as Shandong Electric Power Construction Corp., Shanghai Electric Group Co. Ltd, Dongfang Electric Corp. Ltd and Harbin Power Equipment Co. Ltd, and their Indian customerspower companies such as Reliance Power Ltd, Lanco Infratech Ltd and Adani Power Ltd. Any rise in the cost of the equipment may also lead to higher power tariffs.

The decision has been taken. We will be floating a cabinet note shortly, said a power ministry official who did not want to be identified.

The consensus was reached after a meeting chaired by Pulok Chatterjee, principal secretary in the Prime Ministers Office (PMO), and was attended by representatives of the ministries of finance, power and heavy industries. The power ministry has been asked to float a fresh cabinet note within a weeks time and a tentative date of 28 June has been finalized for the cabinet meeting to be chaired by Prime Minister Manmohan Singh depending upon his availability.

The government seemed to have arrived on a consensus to adopt the committee of secretaries (CoS) recommendation, which suggested an increase of 19%. Any proposed rise will not impact orders placed in the 12th Plan (2012-17) and the impact will only be visible on the orders made for the next Five-Year Plan (2017-22), said a second government official who spoke on condition of anonymity.
While the power ministry had earlier floated a cabinet note ahead of the budget recommending a 5% import duty on power equipment, apart from a 10% CVD and a 4% SAD, this was not considered in the budget. A panel of secretaries had earlier decided to impose the same quantum of duties. The ministry of heavy industries and Arun Maira, member of the Planning Commission and former chairman of the Boston Consultancy Group, had recommended a combination of 10% import duty and 4% SAD.

PMO has asked for accelerating the process and said this is an opportune time to implement the duty. With the kind of discussion we had today, it seems all the stakeholders will have to agree to the CoS proposal, said a top official of the ministry of heavy industries who also didnt want to be identified.

The officials statement is significant; heavy industries ministry was the only ministry opposed to the proposal by the secretaries. It wanted the Maira committees recommendations to be implemented.

While an Adani Power spokesperson said he couldnt comment because he is travelling, both Lanco Infratech and Reliance Power spokespersons declined comment.

Bhel, which comes under the ministry of heavy industries, has been facing competition from Chinese power-generation equipment makers 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.

A Delhi-based power sector analyst, who spoke on condition of anonymity, said, There will be some pain in store for the power developers using Chinese equipment.

Power generation equipment makers having a manufacturing base in IndiaBhel; Doosan Heavy Industries and Construction Co. Ltd; 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.