What the government gives with one hand, it takes away with the other. The mechanism of viability gap funding (VGF) launched in 2007-08 to help public-private partnership (PPP) projects in infrastructure sectors remained terribly under-utilised in the initial years, despite VGF grants being abysmally small. In recent years, however, the VGF’s size and its use by investors have picked up. Oddly, the government, which talks of $1 trillion investment in the infrastructure sector in the 12th Plan period, has now found a potential revenue stream in this subsidy payout.
Tax officials do not seem ready to spare the VGF being given to highway builders to meet project cost, treating it as revenue receipt. Builders who get up to 40% of the cost of PPP projects as VGF from the government to achieve financial closure will now get the funds only after due taxes are deducted at source by the National Highways Authority of India (NHAI).
The move comes at a time when India is laying emphasis on the PPP mode for infrastructure creation, under which already road projects with a cost of Rs 1,76,000 crore have been awarded. It is quite possible that the taxman would look at the VGF granted to investors in other infrastructure sectors as well.
Infrastructure companies have opposed the tax department’s move, saying VGF is capital subsidy, not a revenue stream on which they are liable to pay income tax. The nodal agency for highways has now approached the Central Board of Direct Taxes (CBDT) for relief.
For the revenue-hungry finance ministry and the tax department, the strategy is clear. With the government’s subsidy outgo on oil and welfare measures remaining high, the only way for keeping fiscal deficit under control seems to be to tap every possible source of tax receipts.
NHAI, which has been held as an assessee in default for not deducting tax before paying VGF to highway builders in previous years has been asked to pay ‘due taxes’ for financial years 2009-10 and 2010-11 with interest. In a case where the IT department official in charge of appeals has favoured NHAI on the tax demand, the department has taken the matter to the Income Tax Appellate Tribunal (ITAT).
So far, the finance ministry has approved over Rs 2,000 crore of VGF in infrastructure projects in a bid to help projects to achieve financial closure. If 20% of the cash funding is not sufficient, the government grants another 20% in kind to help the project.
NHAI has been asked to pay about Rs 13.79 crore for 2009-10 and Rs 5.47 crore for 2010-11 as TDS on the funding provided to builders including interest. As per tax officials, tax is deductible at source under Section 194C of the Income Tax Act at the rate of 2% if payment is made to an entity other than individuals or a Hindu Undivided Family. The liability works out to 2.36% of the VGF including education cess and surcharge.
Investments in the road sector have slowed down considerably in the recent past as highway developers face non-availability of land and environment clearances in addition to liquidity problems. The economic slowdown has also affected traffic and toll receipts.