Power transmission firms granted TDS relaxation

Which stock, belonging to the Power Sector, did I recommend yesterday, to the Paid Groups as the Pick of week, in the Report Sent to them??!!

Power transmission utilities, including Powergrid Corporation, the country’s largest, have got relaxation in tax deducted at source (TDS) levied on wheeling charges that was reduced to 2 per cent from 10 per cent earlier.

Wheeling charges are levied by the transmission utilities for use of their network. “They (tax authorities) have now asked us to pay TDS at a concessional rate of 2 per cent. We have agreed to it,” said a senior official from Powergrid.

Earlier this year, the transmission utilities had sought a TDS waiver from the Central Board of Direct Taxes (CBDT), which they said was higher than their tax liability and could result in cash blockage.

Following strict enforcement of TDS rules and show cause notices, state electricity boards and distribution companies had started deducting TDS on wheeling charges paid to transmission firms from January this year. No TDS was being deducted prior to that.

A concerned powergrid, a Navratna public sector enterprise, had met CBDT in March to seek relief from TDS as it feared that more cash outgo than its actual tax liability will result in cash blockage. Like most transmission companies, powergrid is also a Minimum Alternate Tax (MAT)-paying firm.

MAT is levied at 10 per cent (11.33 per cent including education cess and surcharge) of the adjusted book profits in the case of companies where income tax payable on the taxable income according to the normal provisions of the Income Tax Act, 1961 is less than 10 per cent of the adjusted book profits. With TDS also being deducted at 10 per cent, the cash outgo was likely to be higher as tax is being deducted on the entire transmission bill.

“Our concern was that if TDS is higher than the tax liability then it could result in cash blockage. We had requested the CBDT that wheeling charges should not come under TDS net,” said a senior official from Powergrid.

Powergrid is expected to pay MAT of Rs 200 crore for the financial year ended March 2009. The company had a transmission income of Rs 4,188 crore in 2007-08.

Earlier, the tax authorities had issued show cause notices to state electricity boards and distribution companies asking them why they were not deducting TDS on wheeling charges. Unlike powergrid, other transmission firms like Gridco in Orissa are smaller entities and do not make much profit. TDS deduction results in cash blockage for them. As distribution firms have started deducting TDS, Gridco had applied for a non-deduction certificate from the department so that TDS is not deducted by discoms.

“We did not get a non-deduction certificate. We have now got a certificate for paying TDS at a 2 per cent concessional rate,” said a senior official from Gridco. The transmission companies, including powergrid, are already in a dispute with the tax authorities that have asked them to pay service tax.

Earlier this year, the service tax authorities had slapped a Rs 413-crore tax demand on powergrid for various services between May 2006 and September 2008. [From Internet]