Many infrastructure firms have been struggling with heavy debt and slowing investments. Power firms have been hit by the challenge of finding buyers as debt-laden state electricity boards are reluctant to enter power purchase agreements. Photo: Indranil Bhoumik/Mint
Many infrastructure firms have been struggling with heavy debt and slowing investments. Power firms have been hit by the challenge of finding buyers as debt-laden state electricity boards are reluctant to enter power purchase agreements. Photo: Indranil Bhoumik/Mint

Infrastructure firms push for tax consolidation structure

In India, there are no provisions for tax consolidationthe grouping of losses and profits of entities under the same group, a concept which exists in over 20 countries

Infrastructure companies which operate multiple special purpose vehicles (SPVs) for their individual projects have approached the government to permit tax consolidation among these units which would let them offset profits of some against losses of others and cut their effective tax rates, two company officials said on condition of anonymity.

In India, there are no provisions for grouping of losses and profits of entities under the same group, a concept called tax consolidation which exists in over 20 countries.

Infrastructure conglomerates which have submitted a proposal to the government for adoption of tax consolidation include GVK Power and Infrastructure Ltd, GMR Group, ReNew Power Ventures Pvt. Ltd and Tata Group, one of the official cited above said.

Executives of some infrastructure firms have already met finance ministry officials twice in recent months and are likely to meet again later this month to request including the structure in the Union budget, the officials cited above said. Consulting firm Deloitte India is representing the sector and leading discussions with the government.

An infrastructure company on an average operates 20-100 SPVs, of which the early stage companies incur losses while the advanced ones show profits, said Ravi Seth, chief financial officer at ReNew Power, one of the largest clean energy companies in India.

“But because of the web of SPVs under a holding company, setting off of losses against profits doesn’t happen. Today because of the way infrastructure business is, you end up creating a whole web of companies under a holding company, because there is either a PPA (power-purchase agreement) requirement or a lender issue," Seth said.

“In order to facilitate growth, the infrastructure sector constantly needs funds. One of the areas where India is different is that there is no tax consolidation; so, while one arm of a group pays taxes, the other arm does not, leading to unnecessary tax payout. Introduction of tax consolidation in Indian infrastructure will certainly boost the sector," said Hemal Zobalia, partner, Deloitte Haskins & Sells LLP.

Offsetting losses against profits across the SPVs can help companies lower their effective tax rates. Effective tax rates on consolidated basis for infrastructure companies currently can be higher than 30%, Seth said.

Many infrastructure companies have been struggling with heavy debt and slowing investments. Power companies have also been hurt with the challenge of finding buyers for the electricity they generate as debt-laden state electricity boards are reluctant to enter power purchase agreements. Renewable energy companies, on the other hand, are fast expanding and raising funds for their projects, helped by the government’s target of setting up 175 gigawatt (GW) of renewable energy capacity by 2022.

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