Budget 2014: Infrastructure & Manufacturing
Tax Partner, EY
A modern, well-organized and widespread infrastructure is pre requisite for a country's economic growth. Ministry of Finance estimates that infrastructure projects of approx INR 1 lakh crore have been delayed. Time and cost overruns in implementation of projects continue to be one of the main reasons for under-achievement for the sector. Manufacturing sector which has seen significant slowdown over the past few years needs to increase its share of GDP from 15% to 25% which could create as many as 100 million skilled jobs.
Given the above, the new Government has identified infrastructure development and growth in manufacturing sector as its key focus areas. Some of the needs of the said sectors from the Budget are captured below:
Extending the sunset clause in section 80IA for tax holiday for power generation from the existing date of 31 March 2014 to another 5 years and exemption from Minimum Alternate Tax (MAT) which otherwise nullifies the benefit of tax holiday would really provide a thrust to renewable and conventional energy sector.
Exemption from payment of tax under MAT provisions which was earlier available to units in SEZ and developers was withdrawn in 2012. This was not received well by existing units and developers who invested substantially in the SEZs based on Government’s initial promise. MAT exemption should therefore be re-introduced, so that confidence of investors could be restored for further investment.
Implementation of section 14A provision significantly affects many of the infrastructure projects which are awarded through a bidding process and require setting up of Special Purpose Vehicles (SPV) below a holding company The SPV are funded through a combination of equity and debt. Section 14A disallows interest paid on debt funds since SPV pays dividend to holding/ promoter companies, which has a detrimental effect on the sector as debt funds is primary funding avenue. Some amendments are therefore necessary to tone down the rigour and the arbitrariness of this provision.
A long standing demand of the industry is grant of infrastructure status to social sectors such as health and education, areas which has been neglected so far. Financing companies/ banks investing in infrastructure companies have long been pushing for restoration of section 10(23G), withdrawn earlier, for exemption on interest income for financing infrastructure projects. If accepted, this will lower the cost of borrowing funds of infrastructure companies.
Section 32AC was introduced to provide tax deduction of 15% of actual cost of new plant and machinery acquired and installed after 31 March 2013 but before 01 April 2015, where the aggregate amount exceeds INR 100 crores. In order to provide the necessary fillip to the sector, the period for investment allowance maybe extended to three years, threshold of minimum investment be reduced and quantum of deduction enhanced to 25 percent.
The National Manufacturing Policy has proposed creation of National investment and manufacturing Zones (NIMZs) which are being conceived as industrial greenfield townships to promote world-class manufacturing activities. These NIMZs will be larger than SEZs in terms of area and have the potential to foster a collaborative working model across different players along the value chain. Therefore the Government should consider providing tax sops and incentives to boost investments in NIMZ.
On the indirect tax side, the Government should make its intentions of encouraging investment in these key sectors absolutely clear. For instance, the infrastructure sector would stand to gain from reduced rates of duty, exemptions and other incentives being awarded or certified at the time of the clearance of a project rather than being an on-going procedural hassle which make it difficult for the tax payer to claim such benefits.
Uniform treatment of all infrastructure sectors is another area which demands the Government’s attention. For instance, service tax on specified works contracts such as those in relation to airports, ports, railways etc. has been exempted, but such exemption has not unequivocally been extended to other crucial infrastructure sectors such as water, power, transport, sewerage etc.
As for the manufacturing sector, there is a pressing need to liberalise Cenvat Credit regime so as to ensure that there is no cascading of taxes which unduly burden the domestic industry. Another pain point increasing the cost of procurement for the industry is double taxation on activities which are subject to Service tax under the list of declared services and VAT / CST as deemed sales.
Given the importance of infrastructure development and manufacturing in our economy, the Government can play a key role of a catalyst in kick-starting growth in the sectors. This budget would thus, be the one to watch with expectations from Government to deliver big punches as promised during the election campaigns, to put the economy back on a high growth trajectory.
(Views expressed are personal)