Allocation hike to push growth

Allocation hike to push growth

The upcoming state assembly polls in West Bengal and Tamil Nadu, an opposition aggressive over a slew of corruption charges and black money stashed outside the country, lack of support from the coalition parties, inflationary pressures, bearish sentiment in the global markets and specifically the Indian stock market were clear indicators demanding a populist budget from the finance minister, with a specific thrust on infrastructure sector to sustain the current economic growth of around 9%.

The Economic Survey 2010-11 has also revised the 11th Five-Year Plan estimates for total investment in infrastructure to Rs20,542 billion, further enhanced to Rs40,992 billion in the next Plan (2012-17) to increase the momentum of infrastructure growth.

Budget 2011 has made a firm announcement to roll out the direct taxes code (DTC) from 1 April 2012. The constitutional amendment for bringing the goods and service tax (GST) will be introduced during the current budget session. One hopes that the proposed GST Bill is implemented soon without any further delay.

In general, this year’s budget has provided marginal relief to individuals hardpressed by inflation. Marginal relief has also been provided to corporate India by reducing the surcharge from 7.5% to 5%.

The budget proposes to introduce anti-avoidance measures to discourage transactions with persons located in any country or jurisdiction which does not effectively exchange information with India.

From the infrastructure sector perspective, significant announcements have been made, especially on financing. The limit of the FII (foreign institutional investor) investment in infrastructure corporate bonds has been hiked by $20 billion, up from previous limit of $5 billion. To provide long-term financial assistance to infrastructure projects, various financing schemes have been sanctioned in this budget. Further, tax-free bonds of Rs30,000 crore will be issued by the government to boost infrastructure development in railways, ports, housing and highways development.

The budget has also announced notified infrastructure debt funds, especially to attract foreign funds for infrastructure financing. The interest payout on these borrowings will attract reduced withholding tax rate of 5% instead of current rate of 20%.

The income of such debt funds would be tax-exempt. Further, the individual tax benefit for investment in infrastructure bonds for Rs20,000 has been extended for a year. The industry expectation on increasing this limit to mobilize retail funds in the infrastructure sector has not been met.

To attract investment in storage capacity, cold chain and fertilizer sector, the budget proposes to include these sectors as a part of the infrastructure sector. Further, investment-linked tax incentives have been extended for developing affordable housing and to the fertilizer sector.

Considering India’s Vision 2020 thrust on power, the budget has extended the sunset clause under section 80-IA for power sector by one year to 31 March 2012. This positive development is also in sync with the grandfathering provisions under DTC and will provide the requisite push on pending power projects lagging way behind their scheduled implementation.

There is not much tweaking in standard indirect tax rates. Some key amendments relating to the infrastructure sector are extension of excise duty exemption to specified goods supplied for mega power projects and cold chain infrastructure. The excise duty rate for cement has been replaced with composite rates having an ad valorem and specific component with some rationalization.

There’s similar rationalization on the customs duty rate proposed for goods required for highway and power projects. Simplification of the service tax refund procedure is proposed, which will particularly benefit special economic zones.

On the negative front, the imposition of minimum alternate tax (MAT) on SEZ developers and units is retrograde as it seeks to impose tax on income received from investments made with a commitment of tax exemption. The budget proposes to apply dividend distribution tax (DDT) to SEZ developers. This is advancing the negative impact of DTC and should have been avoided.

While the surcharge for corporates has been reduced from 7.5% to 5%, MAT has been increased from 18% to 18.5% to maintain an effective MAT rate. Thus, even though corporate surcharge has gone down, infrastructure projects will not benefit from the reduced corporate tax rate.

The tax holiday for commercial production of mineral oil would not be available for contracts awarded after 31 March 2011. This will impact all the blocks licensed and awarded after that date under the new exploration licensing policy.

Considering that DTC is coming into force from 1 April 2012, not much was expected in this year’s budget.

However, in light of the current economic turmoil, it was expected that the government will propose measures to augment infrastructure investment to maintain the economic growth rate.

While the finance minister has done quite a remarkable job in creating avenues for investment in infrastructure, it remains to be seen whether these policy measures would be implemented in a timely manner and go on to boost infrastructure development in the country.

Uday Ved, head of tax, KPMG