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Good, bad, ugly?


Jayesh Kariya analyses whether the budget has met the expectations of the infrastructure sector

Amidst dispelling clouds of recession, the Finance Minister rose to the occasion and moderately tampered with the Budget 2010 with a mindset that the DTC would be rolled out by April 1, 2011. The thrust areas of this Budget are consolidating growth and inclusive development through series of policy and economic measures.

The Finance Minister conceded the need for accelerated development of high quality infrastructures like roads, ports, airports and railways for sustaining the economic growth. He allocated more than 46% of the total plan allocations towards development of infrastructure. Further, he increased budgetary allocations for roads and railways to the extent of 13% and 6% respectively. Increase in significant disbursements by IIFCL to refinance banks lending to infrastructure sector would help in funding of various projects. Additionally, tax incentives for investment in long term infra bonds would provide additional funds for the sector. All these measures would help in executing several projects proposed in these areas.

Apart from these measures announced in the Finance Bill, there have been several policy changes that have been rolled out in this fiscal year for the infrastructure to bring out reforms. For examples amendment to the Mega Power Policy introduced in December 2009, Re-launch of NELP VIII for Oil and CBM blocks in August 2009, issuance of draft Model real Estate (Regulation of Development) Act 2009, amendments to the SEZ Regulations, etc. All these measures have accelerated the growth pace for the infrastructure sector as is manifested in the statistics provided in the Economic Survey.

Though the focus is on the sector, there are no significant benefits offered on the tax front. This Budget has focused more on indirect tax front as compared to the direct tax front mainly for the reason that the Direct Tax Code is to be rolled out by April 2011 and that the changes on the indirect tax front were proposed to make a step forward to GST regime.

While postponement of GST roll out to 2011 is not great news for the sector, the endeavour to roll it out by the indicated deadline is critical. GST rollout would have a positive impact on the sector especially supply chains and distribution network in the country.

The Finance Minister has tried to give a boost to the infrastructure sector by proposing certain indirect tax benefits. The grant of project import status to ‘Monorail projects for urban transport’ at concessional basic import duty at 5% is set to improve commercial viability of the projects.

Similarly, project import status at concessional 5% duty, service tax exemption and full customs duty exemption for refrigeration units would help in improving commercial viability of cold chain projects, resulting in more capacity build up. Further, availability of ECB for cold storage projects would help in improved accessibility of funds. Overall, this would help in improving food and agricultural supply chain efficiency in the country.

However, the road transport sector may be slightly impacted due to proposed central excise duty increase of Rs1 per litre of diesel and petrol. Further, levy of Service tax on the Air Transport, construction development activities will have far reaching implications on sector as public at large would be directly impacted being the direct beneficiary of the services.

Unfortunately, on the Direct tax front the Finance Minister has stepped back and seems to have disincentivised the stake holders with an exception to some relief for the real estate sector. One of the reasons could be the new theme pronounced in the DTC i.e. shift in the criteria for tax incentives from “profit based incentives to capital expense base incentives”. Importance was given to the development of cold chain, warehousing and food processing infrastructure for improving the efficiency in the agriculture sector, but there are no direct tax incentives provided for these projects. Similarly, the tax holiday net has not been expanded to transport and logistics infrastructure surrounding roads and railway network.

The required boost to the infrastructure sector could have been provided if the tax exemption which earlier available to infrastructure sector funds under Section 10(23G) of the Income tax Act, 1961 were restored.

The real estate sector has got some relief in the form of extension of one year for completion of projects approved on or before 31 March 2008 for the purpose of tax holiday as many projects got derailed due to economic crisis and recessionary trends. Further, increase in the limit for permissible built-up area of shops and other commercial establishments to 3% of the aggregate built-up area of the housing project or 5000 sq. ft, whichever is higher is a positive step forward for economy housing projects.

The other welcome amendment is in relation to tax holiday for SEZ units. The amendment clarifies that the deduction for eligible SEZ units shall be computed with reference to the total turnover of the undertaking as opposed to the total turnover of the business of the tax payer and that this amendment is retrospective from the fiscal year April 1, 2005. This will certainly increase quantum of tax deduction for SEZ units and will all dispel pending litigations on this front.

The other amendment proposed in the Budget will indirectly impact the sector and could increase the overall cost of the projects depending on the terms of payment.

With the pronouncement of Supreme Court ruling in the case of Ishikawajima-Harima Heavy Industries Ltd. V. DCIT (2007), the position in law was settled that payment of fees for technical services to non-residents is not taxable in India unless the services are provided in India and such services are utilised in India. In order to overrule the SC ruling, an amendment was brought out in the Finance Act 2007. However, the amendment was held to be not sufficient enough to overrule the SC ruling as held by the Karnataka High Court in the case of Jindal thermal Power Company Ltd. V. DCIT (TDS). In order to remove the doubt, the Finance Bill 2010 now clarifies that payment of fees for technical services to non-residents is taxable in India in cases where non-resident has rendered services in India. As a result, tax cost for the services could increase where tax cost is to be borne by the user of the services.

The final blow came on the sector wide increase in the MAT rate from the current rate of 15% to 18%.

With surcharge and education cess it will go up to approx. 20%. This is very close to the corporate tax proposed in the DTC. This increase in MAT would adversely impact the companies who are currently enjoying tax holiday as all infrastructure companies are highly capital incentives and have long gestation period for yielding profits.

Overall, the Budget has not met the expectations of the sector which could have echoed the policy announcements and budgetary allocations. The Finance Minister has said that “tax reforms is a process and an event” and one need to be optimistic that the reform process will continue to provide necessary incentives to the sector unless the DTC puts a brake on the reform process.

Jayesh Kariya is a partner in BSR and Associates

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