Infrastructure sector gets a tax relief despite losing major sops2 min read . Updated: 02 Mar 2016, 01:55 AM IST
The benefit, called investment-linked deduction, helps companies defer tax payments to future years
New Delhi: Amid the overall trend of phasing out tax incentives, finance minister Arun Jaitley introduced in Budget 2016 a new incentive for the infrastructure sector aimed at boosting investments in this sector considered crucial for economic growth.
Construction of toll roads, sea ports, airports, bridges, railway systems, highway projects and water supply and irrigation projects now come under Section 35AD of the Income Tax Act that allows deduction of capital expenditure incurred on these activities from the earnings while calculating taxable income in the subsequent year. The benefit, called investment-linked deduction, helps companies defer tax payments to future years.
The Finance Bill 2016 proposes to add developing or operating a new infrastructure facility in the list of businesses that gets this benefit, which at present include laying cross-country natural gas pipelines, setting up fertilizer units, hospitals with minimum 100 beds, affordable housing projects and inland container depots.
The Modi administration is currently phasing out tax breaks for the corporate sector to prepare the ground for reducing corporate tax rate from 30% to a globally-competitive 25%. Accordingly, the government has set deadlines for removing incentives, especially those involving forgoing large amounts of revenue. One that relates to the infrastructure is the benefit outlined in Section 80-IA of the Income Tax Act that allows companies to deduct ‘profits’ from infrastructure projects from their overall earnings while calculating taxable income for 10 years after commissioning the project.
Besides phasing out this ‘profit-linked deduction’ from April 1, 2017, Jaitley also proposed to reduce accelerated depreciation allowed for companies from 100% to 40% from April 1, 2017. While the profit-linked deduction was allowed for 10 years, the investment linked deduction proposed in the Finance Bill 2016 will be available only for a year.
“Profit-linked deductions lead to revenue outgo for the government, while investment-linked deduction leads to only deferring of tax to a future year. Replacing the profit-linked tax incentive with an investment-linked one is in line with the philosophy outlined in the Direct Tax Code," said Hemal Zobalia, partner, Deloitte in India.
One sector that was affected by the restriction in accelerated depreciation is the solar energy sector. Accelerated depreciation benefit was given to solar projects from July 2014 to reduce tax burden and improve cash flow for businesses. India wants to have 100 GW of solar power capacity by 2022—the largest renewable energy capacity expansion in the world.
Zobalia said it was a double whammy for renewable energy companies as 100% profit-based tax incentives are phased out from 1st April 2017 and accelerated depreciation restricted to 40%. Unlike infrastructure, there is no investment-linked incentive from 1 April 2017 for renewable energy.