Budget 2014: Key expectations of the infrastructure sector from policy and tax perspective
Tax Partner - Infrastructure practice, EY
Next five years belong to growth and development of infrastructure. Going by past estimates, if India has to invest $ 1 trillion into Infrastructure, then the policy or road map should be laid out to attract such investment....obviously this calls for attracting foreign investment. This calls for a paradigm shift in thinking process and there seems to be enough confidence that new government will bring in new life into sinking infrastructure sector. In fact recent news reports (about attracting funds for infrastructure from Japan) clearly make this the thinking of the new government. With this background and given the positive mood, we look at some of the key outlooks / expectations of the infrastructure sector from a policy and tax perspective are as under:
Single window clearance system
As has been observed in the past, getting approvals from various regulatory authorities have been resulting into a delay in planning and execution of the projects and consequential increase in cost escalations. The Government has ensured "fast clearances" to infrastructure projects, online environmental clearances, setting a time-limit for approval process and other reforms for fast track clearances system for infrastructure projects thereby plummeting the initial cost escalation. Such a reform will change the mindset for overseas investors and spark Boardroom discussions for revisiting India investment decisions.
Infrastructure investment trust ('IIT')
SEBI has been actively involved in setting up various frameworks for investment in infrastructure sector, so that lack of structures is not an impediment for development of the sector. One of such measures to provide a robust funding mechanism and remove cash-starving amongst infrastructure developers, is that the Government is considering securitisation of infrastructure projects by creating a new investment vehicle known as the infrastructure investment trust. While this is already under consultation stage with the draft paper in place, a push in the budget through special tax/ fiscal incentives and very clear and stable tax regime for IIT will help attract investments from overseas sovereign wealth funds, pension funds etc which look for sustained and fixed returns and would provide a much needed boost to the sector.
Tax holiday on brownfield infrastructure projects
Currently, an ambiguity exists whether the expansion/modernisation of infrastructure projects qualify as "new" infrastructure in order to be eligible for tax holidays. Also, there seem to be two views on whether such advantage extends to participants (like cargo handling service provider etc) who get a sub - concession from the main developer. Accordingly, clarification from the government on the above aspects could help in rebuilding the investor confidence in the sector and also remove ambiguity.
Cost incurred towards construction development
Another ambivalence exists on treatment of cost of construction incurred on infrastructure projects especially where such cost is incurred during concessional periods. The recent CBDT Circular though states that cost incurred towards construction/ development should be amortized over the concession agreement period - the same is not free from ambiguity in case of infrastructure projects where 'ownership' rights are not vested with the concessionaire and thus has further ignited the issue. Accordingly, it is imperious that appropriate guidelines/ clarifications be issued to provide greater clarity on the issue and a platform for a steady and sustained taxation regime.
Minimum Alternate Tax
Various recommendations have been made in the past seeking exemption of MAT for infrastructure projects since the very objective of tax holiday stands defunct with imposition of MAT at 20.01%. A reform in this regard is vital for ancillary infrastructure investment and reducing the skewness between projects planned and executed.
CENVAT credit for construction of factor buildings, hotels, and so on
Service tax paid for construction of a building or a civil structure is not eligible for CENVAT credit on account of a specific exclusion from the definition of 'input services' under the CENVAT Credit Rules, 2004. Similarly, excise duties and custom duties paid on procurement of goods used for construction or execution of works contracts of a building or a civil structure are also not eligible for CENVAT credit.
In order to encourage the infrastructural development, cenvat credit should be extended or duties on inputs used for civil construction of structures including, factory buildings, hotels and such other structures which are used for providing services or for manufacture of goods. Alternately, the duty on such inputs should be reduced when the end use is construction of civil structures which are to be used for providing services or manufacturing goods.