The service tax regime currently applicable to public infrastructure needs to be revisited. While construction services in relation to roads, dams, airports, etc. have been excluded from the purview of service tax, no relief is available to power sector. Even with respect to the former category of infrastructure, the exclusion is confined to specific activities. For instance, while construction of roads/ airports is not liable to service tax, repair or maintenance of such infrastructure attracts service tax.
Such selected exclusions not only increase the overall cost of infrastructure projects, but often also lead to ambiguity around the current tax treatment for composite contracts. Thus, if the concessionaire is responsible for building and operating a public utility for specified number of years under a BOT arrangement, then whether it is providing management/ maintenance services (being a taxable service) to the awarding authority, is clearly a debatable issue. The solution to these challenges being faced by the industry lies in a blanket exclusion for all services provided to all types of essential public infrastructure. This has been a long standing demand of the industry, and any respite in the budget on this front would certainly be welcome.
Applicability of excise duty on various pre-fabricated structures used for construction of flyovers, metro tracks, etc. is another matter of concern for the industry. While the industry has time and again argued that such structures are not marketable as these are meant exclusively for the project being executed, the authorities are not always impressed with this theory. The stand of industry has been put to question even more with the amendment in definition of excisable goods under the excise laws last year, which has substantially diluted the relevance of marketability in ascertaining the applicability of excise duty. Since excise duty, if applicable, could be a significant addition to the project cost which was probably not anticipated by most concessionaires at the time of bidding for various infrastructure projects, the Finance Minister may consider the demand of industry to ensure non-levy of excise duty on such structures.
While the supply of equipment for setting up mega power projects (MPP) is currently exempt from customs and excise duty, the benefit has hardly been reaped by the industry due to the strings attached to getting the MPP status. On the contrary, at the bidding stage, it only adds to confusion for the bidder as to whether or not to factor the MPP exemptions, while finalizing the bid price. While revision of MPP guidelines may not be within the domain of ministry of finance, this should not preempt the finance minister from relaxing the conditions/ procedure to be followed for claiming duty exemptions for power projects.
Another sub-sector that merits attention of the finance minister in the budget is logistics. Given that the industry is still evolving and has been severely hit by the economic slowdown, challenges abound for the players in this segment. The single most important tax for logistics is service tax, which currently offers little clarity on the taxability of various services provided. For instance, in case of multi-modal transport solutions which also entail in-transit terminal handling, it is not clear as to whether each activity undertaken should be classified under the respective categories (such as rail transport, road transport, cargo handling, etc.), or whether all activities should be viewed as one composite service classifiable under Business Support services (which also covers managing distribution and logistics). The distinction assumes significance since the availability of abatement scheme, credits, etc. differ across these categories. A suitable amendment/ clarification in this respect in the budget would be much appreciated.
With the impending transition to GST in April 2010, a fundamental question haunting the infrastructure industry would be whether the tax sops currently available would be continued under GST, which is based on the principle of minimal exemptions/ concessions. The likely treatment under GST could, in fact, also influence the finance ministers decision to extend any more tax sops to infrastructure in the budget this year. Regardless of whether new tax incentives are offered or not, rationalising the existing tax regime to make the law more clear and certain for infrastructure sector is something one would expect to figure in the budget agenda. Given the contribution of infrastructure sector towards realizing the aspiration to make India the fastest growing economy in the world, the sector certainly deserves special treatment.
Pratik Jain is executive director, KPMG and Siddharth Mehta, is a senior manager, KPMG