With the world slowing and steadily recovering from the lethal phase of the COVID-19 pandemic, India is pinning its hopes on Budget 2021 to revive the economy. The infrastructure sector has been the backbone for the development of the nation, and the energy sector specifically, has played a vital role in the same. Given that Budget 2021 is around the corner, the energy sector has widespread expectations, mainly from the context of direct taxes.
Tax Consolidation Scheme: Need of the Hour
The modus operandi of any infrastructure player includes setting up of multiple special purpose vehicles that operate for each project undertaken by them. Typically, a parent entity may have 50 to 100 entities under its umbrella. Currently, each of these entities is administered and assessed for tax as a separate entity which has led to many administrative and financial difficulties.
The long-pending request from the sector is the concept of a tax consolidation scheme. This model works around the concept of taxing the parent entity in respect of all income accrued to it, including the income of its subsidiaries. This concept is not new or unconventional and many developed countries including the US, Australia, and Japan have already successfully implemented the said regime.
This model would benefit the industry by reducing compliance cost and disregarding intra-group transactions that result in unnecessary complexities. This will ensure that the group as a whole is paying tax on the total income earned by it. In addition, it will also benefit tax authorities in administering these entities.
Currently, authorities have to administer a number of entities and there are chances that many of them are not even under the tax radar. However, with this concept, there would be less chance of income escapement and lesser entities can be administered more efficiently. With the government's motto of ease of doing business and with the financial crunch hitting the economy hard, there could be no better time to introduce this concept which could act as a great impetus to the industry.
Relaxation in the provisions of Section 94B
Infra players operate on huge leveraging and the sector is debt intensive with a long gestation period. While the government is incentivising lower withholding rates on loans taken from non-residents, the impact of thin capitalisation provisions under Section 94B of the Income Tax Act ('the Act') has been draconian. Therefore, the existing limit of 30% of EBITDA certainly requires a revisit and an enhancement for this sector.
Further, as an industry practice, any loan taken from a lender is guaranteed by the parent entity. An undesired impact is that even though loans are raised from third-party non-resident lenders, thin cap rules are applicable. Hence, money borrowed from non-resident lenders with the guarantee of resident associated enterprises, are also considered for the purpose of disallowance. Therefore, clarification should be made on the definition of an associated enterprise to mean non-residents to avoid unintended additional cost.
Expanding the scope of Section 35AD
Section 35AD of the Act provides investment allowance on the capital expenditure incurred on specified business. Power projects have always been capital intensive. Inclusion, setting up and operating renewable power plants under the definition of specified business for the purpose of Section 35AD, would incentivise these players to heavily invest and build renewable energy for the nation and meet its renewable energy targets.
Concessional tax regime
If an Indian company opts for the 'lower tax regime' in FY 2019-20, it would be allowed to add back unabsorbed depreciation attributable to 'additional depreciation' pertaining to earlier in opening written down value. However, a clarification is required to provide similar relief to entities opting for a concessional tax regime in FY post-FY 2019-20.
Incentivise consumers to shift to Renewable source of energy
With the government in Budget 2020, shifting focus to renewable energy by allocating Rs 22,000 crore, a section may be inserted under the provisions of Chapter VIA Heading B to provide deduction for setting up solar panels for personal or captive consumption. This may act as an impetus to expand the use of renewable sources of energy in India.
Relax the provisions of Section 80JJAA
Currently, Section 80JJAA of the Act, provides deduction to employers on additional workforce employed by them. The energy sector is labor-intensive and with the current situation of unemployment, relaxing the provisions of Section 80JJAA and increasing the wage limit from the existing Rs 25,000, would incentivise the sector. Such changes would be in sync with labour code changes and industry standards.
In a nutshell, the major expectation is to incentivise and promote the energy sector and to revive the economy, and restore it to normalcy after the impact of the COVID-19 pandemic.
(Jimit Devani is Partner, Shailvi Singhal is Senior Manager and Vibha Venkatesh is Assistant Manager with Deloitte Haskins and Sells LLP.)