Faced with the challenge of awarding road projects worth Rs 1 lakh crore over the coming year, surface transport minister Kamal Nath is exploring a new funding mechanism for the cash-starved highways sector? roping in limited liability partnerships (LLPs) to invest in the sector.
LLPs have a tax advantage over companies, as they are taxed as partnership firms. So their effective tax rate is just 30.9% against 33.99% for a public limited company. LLPs also do not have to pay any dividend distribution tax?a major headache for infrastructure companies. Nor do they attract the minimum alternate tax.
The catch, however, is that since LLP is a new concept in India, introduced only in April 2009; there are no legal provisions to allow their entry into the road sector. The model concession agreement for highways also does not refer to LLPs when listing out entities that can bid for projects. Also, issues relating to taxation and foreign investment need to be cleared before LLPs can be allowed to invest in the sector.
The surface transport ministry is in talks with the corporate affairs ministry and the finance ministry to understand the tax implications for LLPs. Nath is learnt to have initiated inter-ministerial discussions so that requisite clarifications are made to enable LLPs to invest in roads.
The section provides for a 10-year tax holiday to highway developers and sub-contractors. The ministry also wants to ascertain whether LLPs can avail of the tax benefits under the Direct Taxes Code, which proposes to remove the sop for sub-contractors.
A clarification is also needed on foreign investment, not allowed in LLPs. Internationally, many fir-ms set up as LLPs invest in infrastructure through dedicated funds.
?LLPs are a recognised format the world over and allowing them to invest in infrastructure projects would be a good move. But the government must clarify questions on the concession agreement and issue guidelines on foreign investment,? said Satish Aggarwal, partner E&Y.