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Taxation – The tax station

Comment

The importance of infrastructure in a nation’s sustained economic development is well recognised. An inadequate and inefficient infrastructure results in high transaction costs proving to be an impediment in realising the full potential of an economy.
Infrastructure in India still remains a major problem area, and as per the World Competitiveness Yearbook brought out by the International Institute for Management Development, its rank declined from 49th in 2008 to 57th in 2009. The Indian Government is not oblivious of the major role infrastructure has to play in the Indian growth story and it has been identified as one of the main focus areas by the new Government at the Centre. Even in his recent budget speech, the Finance Minister (FM) mentioned that he is targeting to increase the investment in infrastructure to more than 9% of GDP by 2014.
In the past as well, efforts had been made to address the challenges facing this sector. The FM, while presenting the Budget in 1995, had acknowledged the infrastructure sector in India as a weak area and made a case for providing tax incentives to enterprises engaging in the business of developing infrastructure facility. Profits from a number of infrastructure facilities like roads, rail system, ports, bridge, highway etc. were made eligible for tax benefits under section 80IA Income Tax Act, 1961 (Act).
The government has also roped in private sector investment through Public-Private-Partnership (PPP) schemes to tide over the resource crunch it faces. One such landmark PPP scheme was container train operation which hitherto was being carried out by the Government owned Container Corporation of India (Concor).
In 2006, the container cargo business was thrown open to competition inviting private participation in containerised cargo segment and concession agreements were subsequently signed with various private players.

As per the scheme, concessionaires are broadly required to procure rolling stock, develop rail terminals and lay feeder tracks connecting depots to the existing railway tracks of Indian Railways. The container train would then be hauled by Indian Railways and taken to the destination as desired by the concessionaire.
The concessionaires who enthusiastically participated in the PPP scheme seem to be realising the hard way that they have more problems to face than they had anticipated. As a matter of fact, most of their containerised cargo business is not expected to make profits in the near future. Add to it the uncertainty on their profit being eligible for tax holiday as and when they are out of red.
To delve a bit deeper, Section 80IA of the Act provides that where an undertaking develops any ‘rail system’, it shall be entitled to claim 100% tax holiday on its profit for ten years out of a block of twenty years.
It is intended to benefit enterprises who undertake entrepreneurial and investment risk and not contractors who only undertake business risk. The moot point is whether procuring rolling stock and doing the allied activities as per the concession agreement can be considered as ‘development’ of rail system within the meaning of the section. Also, even if it is considered as development of a ‘rail system’, whether the requirement is of developing the ‘entire’ system or even a ‘part’ of the system would satisfy the condition.
One would feel that the concessionaires have a fair case to claim tax holiday on their profit. The intention behind introducing tax holiday for infrastructure facility development was to recognise the fact that such businesses are capital intensive and have a long gestation period and thus would require some incentive for speedy development.


Also, the original version of the section was modified some years later and the mandatory condition of infrastructural facility to be transferred back to Government was removed. This clearly showed that even if the infrastructure facility was to remain with the private sector, it could still enjoy tax holiday as long as they had taken investment and entrepreneurial risk in the specified businesses. One of the prime reasons, as made clear in the rail minister’s speech, for Government to allow private players to operate container trains has been the lack of resources on its own.
On the aspect of satisfaction of technical requirements of the section, one may rely upon judicial precedents to support that development of even a part of the infrastructure facility would make the concessionaire eligible for tax holiday. Even Central Board of Direct Taxes (CBDT), in the context of water treatment system, clarified that effluent treatment and conveyance system being “part” of water treatment system would qualify for tax holiday.
It is interesting to note that the various committees of government including Empowered Sub Committee on infrastructure and Central Statistical Organisation include rolling stock in the definition of infrastructure. However, the tax department does not seem to concur with such a view.
In case of Concor, a Government owned company, they denied them the benefit of tax holiday on profits relating to their rolling stock division. The matter was further litigated and Delhi Income Tax Appellate Tribunal (“ITAT”), based on specific fact pattern of Concor, ruled in its favour and allowed them the tax holiday benefit. It is still to be seen whether tax department would further agitate the matter before the High Court and how the High Court would interpret it in such a scenario.
The uncertainty regarding the tax benefit is adversely affecting the already challenging business environments of Concessionaires.
It was anticipated that the latest Budget would come out with appropriate amendments to address the same which, however this has not happened. Rather, quite interestingly, the FM has mooted the concept of investment linked tax exemption as compared to current regime of profit linked tax exemption with regard to certain infrastructural projects. He has also increased the Minimum Alternate Tax (‘MAT’) rate from 10% to 15% further impacting the bottom lines of the concessionaires. The new tax code is likely to be released for public comments by the time this piece is published. It would therefore be very useful to watch the fine print in the new tax code as far as tax holiday provisions are concerned.

Satish Aggarwal is a tax partner with Ernst & Young (India)

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