In yet another attempt to make the cash-starved highways sector attractive for foreign moneybags, the road transport and highways ministry is seeking an exemption from dividend distribution tax (DDT) for special purpose vehicles (SPVs) constructing highways. The move is aimed at reducing the cascading effect of the tax, which is a confounding issue for foreign investors.
The dividend distribution tax irritant is one of the key concerns that were discussed at a recent brainstorming session of surface transport minister Kamal Nath and ministry officials with private developers and sectoral experts. Road projects, like most infrastructure projects under the public private partnership model, have to be carried out by SPVs. Consequently, any private company will have a number of project-specific SPVs that attract dividend distribution tax of about 17%.
The catch, however, is that under the existing income tax laws, there is cascading effect of the dividend distribution tax, which turns out to be a major disincentive for private players. The investor has to pay the tax not only when the SPV declares dividend, but also when its holding company pays a dividend from its total earnings.
Foreign investors are expected to put in $10 billion in the highways sector, which requires funds to the tune of $70 billion in the next few years.
DDT is a vexing issue as foreign investors first need to set up a holding company in India, and the holding company then sets up SPVs for different road projects.
Foreign investors are also at severe disadvantage as most of India?s bilateral tax treaties do not allow them to take credit at home for paying DDT in India.
To woo foreign investments, Nath has held roadshows in Switzerland and the United States, where even big-ticket pension funds evinced interest in Indian highways.
?The plan is to either seek exemption for road sector as a whole from payment of DDT or keep it effective for only two layers. This would ensure that SPVs of foreign companies are outside its purview,?
an official present at the meeting said.
Road developers have also sought clarifications on a number of other tax-related issues from the surface transport ministry, which is expected to send its recommendations to the finance ministry by October. ?We hope to get them resolved before or in next year?s Budget,? the official told FE.
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?Exemption from payment of DDT would have a positive impact on the sector, as investments in most road projects are at two to three different levels. But having said that, it should also be extended to other sectors like power and ports that face the same problem,? said Arvind Mahajan, executive director KPMG.
Nath had highlighted the issue at the Express Group?s Idea Exchange recently: ?A foreigner said why should I invest, I have got this dividend distribution tax. So I have an SPV in India. That SPV is owned by another company. So I am paying dividend distribution so many times. In an SPV, he has to have minimum cash retention for dividend. He says we are blocking all our funds. But this is not for a company; this is just for a road. These issues have never been looked into. And we started this off. This attracts a lot of investors. Otherwise nobody will invest.?