Published Editorial

Exemption from MAT will be shot in the arm for infra firms

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The financial express


Samir Kanabar

Tax Partner

Contributed by:

Shashidhar Upinkudru
Senior Tax Professional

There is no ambiguity that infrastructure development is a prerequisite for growth and needs special attention for the much anticipated India growth story. There have been concerns over the delay in completion of projects that have lead to huge cost overruns.

The finance minister has mentioned that the Budget will be responsible; there are hopes that this Budget will be dynamic and reformatory for infrastructure sector.

The major step required from the government is to exempt infrastructure companies from the purview of the provisions of minimum alternate tax (MAT). Currently, profit-linked exemptions are available to infrastructure companies. However, the levy of MAT on such companies not only defies the very objective of exemption provided to such companies but also results in undue cash outflow, especially during the critical initial period.

Another issue faced by the sector is disallowance of expenditure incurred to earn exempt income (u/s 14A of the income-tax Act, 1961 (Act)). NHAI requires the successful bidder of the contract to set up special purpose vehicles (SPV). Section 14A disallows the interest expenses incurred by the holding company to fund the project housed in an SPV (since the SPV would be paying dividend which would be exempt income in the hands of the holding company). Looking at NHAI’s requirement housing such projects in SPVs, an amendment to exempt such companies from the provisions of the section 14A is necessary.

Separately, an initiative that could promote public participation towards infrastructure development would be through long-term infrastructure bonds. Incentive for investment up to R20,000 into infrastructure bonds stands withdrawn. Given the current state of the infrastructure sector, such incentives should not only be continued but the limit should be increased to boost investor sentiments.

As a policy measure, the government could introduce framework of fiscal consolidation for the infrastructure players. Generally, infrastructure players have multi-layered structures for carrying out projects. The losses generated by one SPV cannot be set-off against another leading to liquidity tribulations. Fiscal consolidation for these infrastructure players would release the pressure of the players due to reduction in their tax costs.

On the indirect tax front, a comprehensive negative list-based service tax regime was introduced from 1 July, 2012, and the industry is still grappling with various anomalies therein. Exemptions have been granted to specified infrastructure projects such as construction of roads, bridges, dams, ports and airports, while other key projects such as power and LNG re-gassification continue to be kept out of purview of service tax exemptions. Equally ambiguous is the exemption provided for repair, maintenance and renovation of roads, bridges and dams, but not to similar services for ports, airports and railways (including monorail and metro). With the government seeking active private sector participation, it would be beneficial to bring parity in service tax treatment for various projects.

In addition to providing service tax exemptions, to rein in increasing input costs, the sector expects restoration of Cenvat credit on all business-related expenditure on goods as well as services.

On the housing front, an exemption from service tax on residential construction is now limited to only a single dwelling unit (earlier allowed to a complex of up to 12 units). With the common man already reeling under ever-rising property prices, the government should consider restoring the erstwhile exemption. The service tax rate on renting of immovable property should be brought at par with the composition rate of 3.09% available to construction contracts, as both activities pertain to use of immovable property.

Given that the economy is still struggling from global recession and inflationary trends, the industry expects to see the excise duty and service tax rates remain constant. With recent developments on the GST front, it is also looking forward to announcement of a more definitive road map towards GST.

With the hazy numbers of industrial output and dipping GDP growth, a support from the government to the sector is much anticipated. Although the industry has many expectations, it is expected that the Budget will take care of its concerns, which will in turn help in delivering a better GDP growth.

(Views expressed are personal.)