Budget 2017 wishlist: Infrastructure

Expectations of Infrastructure sector from Union Budget 2017-18:

Consolidated Group Tax Return

Currently, either due to bidding or financing requirements, parent infrastructure companies normally create multiple subsidiaries in the form of Special Purpose Vehicles (‘SPVs’) for each separate project. Separate SPVs are also incorporated to meet the guidelines of a concession agreement or to execute projects under the public-private partnership arrangements. As such, there could be a potential situation that Independent Power Producing Company may eventually be required to incorporate more than 50 SPVs to execute over 1 GW power projects of different sizes.

Under the current tax regime, each SPV is regarded as an individual independent tax entity and, therefore, required to undertake separate and individual income-tax return filing. Significant efforts and cost are incurred for undertaking income-tax compliances.

The tax compliance and litigation costs directly impact the margins of the infrastructure company in this competitive market and negatively impact the ease of doing business in India. Considering above, it is recommended that the law should be appropriately amended to include provisions of group tax filing for infrastructure groups.

-Rationalisation of Provisions pertaining to Infrastructure Investment Trusts (‘INVITs’)

Section 47(xvii) of the Act provides that the transfer of shares of an SPV (Special Purpose Vehicle) to a business trust, in exchange for units in such trust, would not be considered as transfer in the hands of the sponsor. The SPV is defined to be an Indian company and does not include any other forms of entity. Accordingly, the exemption has not been provided for transfer of interest in LLP. Where other assets (apart from shares) are exchanged, the same would trigger tax implications at the time of such exchange.

Considering LLP structure is being followed by large conglomerates increasingly, it is suggested that the above exemptions should be granted for transfer of interest in LLPs in exchange for units of business trust. It is further recommended that where other assets are transferred, the benefit of capital gains exemption may be extended to such assets as well.

Proviso to clause (42A) of section 2 of the Act provides period of holding for listed security (other than a unit) as 12 months to constitute ‘long term’ capital asset. Such period of holding should be applied even to units of business trust to determine the nature of capital asset. It is therefore suggested that necessary amendment be made in the Act to treat units of a business trust as long term if held for more than 12 months.

Amendment of Section 80-IA Regarding Upgrading Existing Infrastructure

Infrastructure development is a pre requisite for the growth and development of any country. Infrastructure development is available in two ways i.e. to build altogether new infrastructure or to convert the existing structure by upgrading it and also enhancing the existing capacity. Both activities entail huge investment and human efforts. However, there is ambiguity in the Act as to whether such modernisation or expansion projects qualify as “new” infrastructure facility in order to be eligible for income-tax holiday or weighted deduction under section 35AD of the Act.

It is recommended that a suitable amendment may be made in the Act to clarify that the up-gradation/extension of the existing infrastructure facility would also be eligible for the benefit under section 80-IA of the Act or under section 35AD of the Act (as per the amendment made by the Finance Act, 2016). Clarification on this issue would boost the investor sentiments and thereby lead to modernization of antiquated infrastructure of the country.

-MAT on Infrastructure Companies

The tax holiday available to the infrastructure companies gets severely compromised since the companies are required to pay MAT on their book profits. A high MAT rate can have a significant impact on the project Internal Rate of Return.

Resultantly, projects do not get complete benefit from the tax incentives provided by the Government. In order to provide tax exemption to infrastructure projects in letter and spirit and to attract more and more investment in infrastructure sector, it is advisable that MAT on infrastructure companies should be abolished.

-Restoration of Deduction under Section 80CCF

Section 80CCF was applicable to an individual or Hindu Undivided Family for the investments made in long term infrastructure bonds. Maximum deduction which was allowed was up to Rs. 20,000. This deduction under section 80CCF was over and above the existing aggregate limit of deduction allowable under section 80C, 80CC and 80CCD of the Act.

However, the said deduction was discontinued w.e.f. Assessment Year 2013-14.

It is recommended that deduction under section 80CCF of the Act should be continued and allowed for investments made by assesse.

-Restoration of Section 10(23G)

Section 10 (23G) of the Act provided for exemption of interest and long-term capital gains, in the hands of infrastructure companies, derived from lending or investments made in approved eligible projects, development of special economic zones and housing projects. However, benefit was discontinued by the Government with effect from 1 April 2007.

Discontinuation of Section 10(23G) of the Act has affected entities who were engaged in infrastructure finance such as financial investors, infrastructure finance companies, banks etc. Post discontinuation, investors have started asking for higher returns since their income from infrastructure finance activities would now be taxable.

It is recommended to restore the benefit provided under section 10(23G) of the Act.