To meet a $1-trillion infrastructure spending need until 2017-18, the government on Tuesday indicated it was open to far reaching changes in the financing and execution of projects, including possible tax-free status for infrastructure bonds by the private sector.

Finance minister Pranab Mukherjee said on Tuesday he will consider tax-free status for bonds floated by non-banking finance companies or other private financial institutions to fund infrastructure projects, according to news agencies. Mukherjee was speaking at a conference on infrastructure organised by the Planning Commission.

However, later in the day, revenue department officials denied knowledge of such proposals and said with the Budget already in Parliament, any changes thereon will be announced only in the Lok Sabha.

In Budget 2010-11, the finance minister has created a dedicated tax-free window for infrastructure bonds. He has allowed income-tax exemption of up to Rs 20,000 per year in addition to the Rs 1 lakh savings window, for investments made in specific bonds.

These bonds will be notified by the finance ministry. While DR Dogra, managing director of credit rating agency Care, said the proposal was welcome and would allow for finer rates for the private sector infrastructure companies, finance ministry officials said this could tantamount to a tax subsidy for the sector.

The $1-trillion funding gap was mentioned by Prime Minister Manmohan Singh in his opening remarks at the conference. ?I urge the finance ministry and the Planning Commission to draw a plan of action for achieving this level of investment.?

In response, the finance minister said the government is willing to reconsider the sector-exposure caps of banks and other financial institutions that limit the availability of funds for key infrastructure sectors, as reported by FE on Monday.

He said though the government?s efforts to strengthen bank capital would help here, the full potential of insurance and pension funds for deployment in infrastructure projects has not yet been successfully exploited.

Mukherjee also said the government plans to rework the mandate of India Infrastructure Finance Company Ltd. ?We propose to gradually refashion IIFCL as a force multiplier for this sector.?

The minister said gross capital formation in infrastructure in the first three years of the 11th Plan period has been on expected lines. ?However, this is not to say problems do not remain. We remain constantly aware of the magnitude of the unfinished agenda in infrastructure.?

Meanwhile, Japan on Tuesday encouraged its top conglomerates to invest in India, citing the multi-billion-dollar investment India is making to upgrade its infrastructure. India plans to spend $90 billion to develop the industrial corridor, some $70 billion of which it hopes to raise by attracting investments from the private sector, Kyodo news agency quoted the Japanese ministry of economy, trade and industry as saying.