The infrastructure sector has various concerns, such as land acquisition hurdles, unavailability of cheap and steady flow of natural resources such as coal, cement, iron-ore, etc., delayed clearances for projects, red tape, no coordination among various ministries, and insufficient incentives.
Further, infrastructure projects require extensive capital investment, have a long gestation period and certain sectors, such as power, suffer from low profitability. Investors today are shying away from this sector in spite of its huge potential. The infrastructure sector requires a major boost and a pervasive approach to address its concerns and also to attract foreign investment is required.
FULL COVERAGE:Modi government's first budget We highlight below certain considerations that the Finance Bill could present for the infrastructure sector:
1. Enhanced incentives: Some incentives available for the infrastructure sector have reached expiration. As the law currently stands, the tax holiday for units generating/distributing power would not be available for the current financial year. Also, minimum alternate tax and dividend distribution tax have taken away the sheen from various tax incentives.
Under the Direct Tax Code 2013, the tax holiday for units in the Special Economic Zone would not be available unless the unit starts operations before March 31, 2015. Further, the Code also offers incentives based on investment and not profits. This could discourage investors as they are ensured of lower tax only up to the recovery of their capital investment and not on subsequent profits. Incentives which reduce the effective tax burden and which subsidise the commercial difficulties would be welcome.
2. Inclusion for LLP: Infrastructure companies, which are required to form special purpose vehicles for road or power projects, have to bear additional tax at the time of repatriation of cash to the holding company. Limited Liability Partnership (LLP) form of entity could be used as a special purpose vehicle (subject to exchange control clarifications) as cash extraction would not be subject to distribution tax.
Also, infrastructure service companies could consider an LLP structure. LLP form would also require recognition by authorities, e.g., National Highways Authority of India, while awarding concession agreements. However, various tax benefits are presently only available to a company and should be extended to an LLP:
a. Tax holiday is available for developing infrastructure facilities, such as roads, ports, airports, waterways, irrigation projects, water treatment systems.
b. Transfer of assets during reorganisations is not subject to tax.
c. Capital expenditure for business of warehousing, cold chain facility, hospital, housing project, etc., are eligible for one-time deduction.
3. Accelerated depreciation of 80 per cent should be revived for the wind energy assets to infuse the infrastructure sector with green and clean energy.
4. New vehicles to raise funds: As per recent news, the government is believed to be introducing a new vehicle called infrastructure business trust which would enable easy raising of long-term capital.
Clarity must be brought for various taxation aspects for existing companies to transition to this new model, such as capital gains on transfer of assets to the trust, exchange of shares of company for units in the trust, capital gains on transfer of trust units in future.
5. No widening of tax base through retrospective amendments: In the recent past, there have been multiple retrospective amendments. One was taxation of interest, royalty and technical fees paid to a non-resident irrespective of whether he/she has any substantial business activity in India or not.
Many engineering, procurement and construction services are availed for infrastructure projects. Such companies, typically, have no real or significant link with India except for receiving payments from an Indian party. Taxing them would not be an approach generally followed by the OECD countries and it causes much difficulty. Further, retrospective amendments which are not truly clarificatory in nature but which widen the tax net, must be avoided as it encroaches on the promise made to the taxpayer.
6. Reduction in taxation rates of royalty and technical fees: The withholding tax rate for royalty and technical fees payments to non-residents was increased to 25 per cent in the last budget. Technology import is essential for development of world-class infrastructure.
Practically, the withholding tax on these contracts is agreed to be borne by Indian parties along with the withholding tax obligation as per the tax law. A reduction in this rate would reduce the burden of Indian companies irrespective of the foreign party being eligible for treaty benefits.
Besides the above, there are high expectations for reforms in the overall tax regime to improve business sentiment and luring foreign investments.
Some of these are-greater clarity and training of tax authorities before implementation of anti-avoidance rules, reduction of well-known litigious issues by way of swift clarifications from the tax department, and rationalisation of widespread transfer pricing adjustments.
Stability and clarity in implementation of the tax laws would go a long way in improving the image of India as an investment destination for global companies. And as per Mr Modi's philosophy, good infrastructure forms the basis of people's will to work, economic growth, prosperity and happiness.
Girish Vanvari is Co Head of Tax, KPMG in India, and Harsha Rawal, Director - Tax, KPMG in India.