New Delhi: Infrastructure is the backbone of an economy. Given the substantial capital investment required, it is imperative to invite private sector participation in infrastructure development.
Tax incentives play a significant role in attracting investments. The ensuing budget could address the following need for tax incentives for attracting investments in the infrastructure sector
Tax holiday for power sector
Currently, 100% tax holiday is provided to an undertaking engaged in the business of generation of power or generation and distribution of power. Tax holiday is also available to an undertaking engaged in the business of transmission and distribution of power by laying a network of new transmission or distribution lines or by substantial renovation and modernisation of the existing network of transmission or distribution lines.
The above tax holiday will not be available for undertakings which commence operation after31 March 2010. To attract more private investment in this sector, tax holiday entitlement should be extended for undertakings which begin operation after 31 March 2010 as well.
Power sector companies are liable to pay Minimum Alternate Tax (MAT) on their book profit which dilutes tax holiday incentive.. Therefore, profits and gains derived by an industrial undertaking from generation or generation and distribution of power should be excluded while computing the book profits for MAT purposes.
Tax holiday for natural gas distribution network
100% tax holiday is available for profits and gains derived by an undertaking from the business of laying and operating a cross-country natural gas distribution network, including pipelines and storage facilities being an integral part of such network.
Several conditions prescribed for availing benefit of this tax holiday like one-third of its total pipeline capacity to be available for use on common carrier basis, etc. act as constraints for attracting investment and need to be relaxed.
Section 80IA(12) provided that where any undertaking of an Indian company which is entitled to deduction under section 80IA is transferred before the expiry of the period specified therein, to another Indian company in a scheme of amalgamation or demerger, the provisions of this section apply to the amalgamated company or the resulting company as they would have applied to the amalgamating company or the demerging company if the amalgamation or demerger has not taken place.
The Finance Act, 2007 inserted new sub-section (12A) which provides that the provisions of sub-section (12) shall not apply to any undertaking or enterprise which is transferred in a scheme of amalgamation or demerger after 31 March 2007.
The intention of the legislature is to grant deduction qua undertaking and not qua tax payer. Therefore, introduction of sub-section 12A may be deleted retrospectively to encourage business restructuring in the infrastructure sector.
Extension of service tax exemption
Infrastructure projects like roads, airports, railways, transport terminal have been excluded from the scope of taxable services of commercial or industrial construction service and works contract service. However, critical infrastructure projects such as petroleum operations, setting up refinery and power projects are not exempt. Not only the coverage of exemption should be extended but also, all the categories of services availed by these sectors should be exempted from tax net.
Temporary importation for project execution
Currently, machinery, equipment and tools can be imported on temporary basis for executing projects at concessional customs duty based on period of usage. The period allowed for re-export is 3 to 18 months and the extent of duty burden increases as the period extends. In view of longer duration for infrastructure projects, maximum period should be extended to at least 36 months and the extent of duty burden be capped at 50%.
Mechanism for grant of incentives
Due to certain procedural inefficiencies at the implementation level, the Government has re-introduced the exemption in respect of services wholly consumed in SEZ. Granting exemption leads to loss of input tax credit to the service providers.
Therefore, in cases where exemptions are granted, the service providers should be allowed to avail the input tax credit. Necessary mechanism in this regard is present for suppliers of goods to a SEZ developer or a unit and now should be extended to service providers.
Exemption by state government
In order to incentivize private sector participation in infrastructure projects, State Governments need to extend the exemption from state levies like VAT, Entry Tax and Stamp Duty etc. for these projects. There is urgent need that authorities at Central and State level work in tandem to achieve the objective of overall infrastructure development.
In a nutshell, a holistic approach towards granting incentive to infrastructure projects is required to take India to a high growth trajectory.
The authors are with Deloitte in India