The expectation is that the budget will give a massive impetus to the infrastructure sector in terms of extra budgetary allocation as the current government looks to boost economic growth.
With the country still reeling under the impact of demonetisation, one is eagerly looking forward to the Union Budget 2017 with a heightened expectation of tax reforms. The expectation is that the budget will give a massive impetus to the infrastructure sector in terms of extra budgetary allocation as the current government looks to boost economic growth amid demonetisation at home followed by a global slowdown.
With the recent conclusion of the Vibrant Gujarat Summit 2017 and announcement of major infrastructure projects in Maharashtra, comes a reinforcement from the Government of its commitment to give a boost to the infrastructure sector across the country. Against this backdrop, it will be interesting to see the tax reforms/ policies that will be announced in the upcoming Budget with a view to accelerate expansion of infrastructure in the country. Some of the key tax reforms/ policies one would like to have from this Budget for the infrastructure sector are discussed as under:
At the outset, a single window clearance should be introduced for an infrastructure project in any of its subsectors instead of a plethora of approvals as required currently. This would encourage and build the confidence of investors in this crucial sector. The role of e-governance should be increased to fast track pre-execution process and improve monitoring of infrastructure projects.
According to industry estimates, Indian aviation market is expected to become the third largest across the globe by 2020. To achieve this landmark, it is essential that underserved and unserved airports are connected offering easy air connectivity to people living in far-flung areas of the country by offering affordable and accessible connectivity. The Government is working on ways to boost regional air connectivity in the country. Regional Connectivity Scheme (‘RCS’) for aviation or UDAN (Ude Desh ka Aam Nagarik) was formally launched in October 2016 after its introduction in the National Civil Aviation Policy, 2016.
Government is also working on a proposal to develop runways on highway stretches in a manner that they double up as airstrips. RCS is proposed to be used by offering fiscal incentives, infrastructure support, procedural simplifications and viability gap funding for connecting unconnected airports. However, the Government needs to pay heed to issues plaguing this sector such as fuel taxation, funding constraints, high operating costs, land acquisition, environmental clearances etc. Government should consider establishing a dedicated Greenfield authority with representatives from all segments of the development activity, single window of clearance, initiate environmental clearance and land acquisition process before opening bid etc which can help alleviate the issue.
For the tax policy regime, in order to support and assist the infrastructure sector, by rationalising the tax costs for the sector, Government should consider the following:
> Gradual reduction in MAT rates to match the reduction of tax rates and phasing out of tax exemptions and incentives. At the time of introduction of MAT provisions, the intention of the Legislature was to tax certain companies who were otherwise profitable but were not paying income-tax on account of various deductions/ benefits/ exemptions. Given that such exemptions are now being phased out, the government should consider reducing the MAT rates to provide tax relief to the sector.
> Due to government/ contractual requirements, investors are required to set-up separate SPVs for every project. In order to reduce the tax compliance and litigation costs which directly dent the margins of these companies, provisions for fiscal consolidation for infrastructure groups should be introduced.
> In order to facilitate growth of InvITs, exemption from capital gains should be granted for transfer of interest in LLPs in exchange for units of a business trust as many large conglomerates follow the LLP structure. Further, units of business trusts held for over 12 months should be treated as long term capital assets.
> To achieve the daunting renewable energy targets set by the government, investment linked incentives should be introduced for the renewable energy/ power sector, which is currently missing. Further, in order to entice investors interest, accelerated depreciation allowable for green energy assets should be reinstated to 80 percent instead of 40 percent (as prescribed by a recent CBDT notification)
> It is expected that the finance ministry may take a benevolent view of the request made from various quarters to abolish Income Computation and Disclosure Standards (‘ICDS’), which came into effect from the financial year commencing April 1, 2016. Application of ICDS results in advancing the recognition of income or deferring recognition of expenses or losses, both of which can have a potential tax impact. This reform will result in simplification of the income tax law, as multiple methods of accounting only create interpretation issues and additional compliance burden.
To conclude, Budget 2017 provides an opportunity to the government to give an impetus to the infrastructure sector, which has been and will continue to be one of the pillars of economic growth and progress, required to create a truly business-friendly environment in India and supplement the development agenda of the present government.
(Authored by Miti Shah, Director, Tax & Regulatory Services, EY India. Kushal Shah, senior tax professional, EY also contributed to the article. Views expressed are personal)