As part of efforts to incentivise the power sector and make its operations viable, the government is looking to extend the benefit of lower corporate tax to electricity generating units by qualifying their activity as manufacturing.

Under the amended Finance Act 2019, concessional tax rate of 15 per cent is applicable on a domestic company set up and registered on or after October 1, 2019 and which starts manufacturing on or before March 31, 2023. But this provision has been restricted in application to a company engaged in manufacturing or production and leaves out power generation.

This may change now with electricity generation qualifying as manufacture. The changes may form part of the budget proposals, to be announced by Finance Minister Nirmala Sitharaman on February 1, according to a source privy to the development.

"Numerous court orders have made it clear that electric energy has all the trappings of an article or goods. The process of its generation is also akin to manufacture or production of an article. Thus, the broad understanding is that new power projects should also get the same treatment as other manufacturing units," said a government source.

Industry chambers have also pushed for the changes that, they feel, would be a big incentive for the corporate sector to invest in greenfield power projects. Absence of demand and poor financial ability of state-run power distribution companies have created distress-like situation in the sector with several units coming under stress.

With the incentive, available to the sector by way of tax holiday, also getting over and the government not inclined to return to the earlier system of tax holidays, relief by way of lower corporate tax could help companies looking at making fresh investments.

To provide clarity and certainty, the government might amend provisions of section 115BAB of the Finance Act 2019 to provide that companies engaged in generation of electricity should also be entitled to the benefits provided, sources said.

Alternatively, a clarification may be issued to provide that manufacture or production of an article or thing will also include power generation.

A lower 15 per cent duty would be big relief to promoters of power projects as they are liable to pay 25 per cent corporate tax now. Companies, like Adani, Tata, Vedanta and JSW Energy, are all looking to expand their power sector footprint, but are awaiting the right climate to commit fresh investments. Tax relief, apart from assurance of fuel, is expected to give a push to fresh investments.