The reality is that the current level of investments in infrastructure sector is nowhere near the expectation...
We are already halfway through in the XIIth Five Year Plan (2012-17) where it was anticipated that at least a trillion dollar investment would be needed for funding the infrastructure development. The reality is that the current level of investments is nowhere near the expectation. The infrastructure sector is in dire need of long term investments, fiscal incentives and an investor friendly atmosphere, and the first full budget (Budget 2015) of Modi Government provides the ideal opportunity for the FM to fast track investments in the infrastructure asset class through some strategic fine tuning of current investment policies and tax framework.
Brownfield Projects/General Infrastructure Bonds
Refinancing brownfield infrastructure projects through the existing avenue of Infrastructure Debt Funds (“IDFs”) should be further explored. Specifically allowing FDI in IDFs established as NBFCs, re-instatement of deduction on subscription to infrastructure bonds under Section 80CCF of the Income Tax Act, 1961 (“Act”) and increase in the minimum limit to at least INR 50,000 are options to be considered.
National Infra Fund
To meet the humongous funding requirements, a National Infra Fund may be created which can be funded through levy of a nominal cess as tax-on-tax on the Taxes (corporate, income, customs, excise and service tax). Imposing infrastructure cess on a nominal rate on consumption of petrol and diesel etc may also be considered.
Measures like express exemption from minimum alternate tax for transfer of assets from SPVs to InviTs, abolishing minimum alternate tax applicable for infrastructure projects availing tax holiday under Section 80-IA of the Act, extending the tax holiday to upgrading, refurbishing and augmenting of existing infrastructure (which was allowed only for transmission and distribution lines) and allowing amortization of development cost under the ‘build-operate-transfer’ model are also recommended. Consortiums for EPC and other infrastructure projects should be excluded from the definition of ‘association of persons’ under the Act, by an amendment.
Allocations to the National Electricity Fund for further interest subsidy loans and debt restructuring to redress the situation of DISCOMS, equity support, debt restructuring and creation of a power sector fund for power generation companies, are some of the options for the power sector. Re-instating depreciation rate on wind mills to 80%, service tax exemption to transmission/distribution activities by power generating companies essential for sale of power, extension of benefits of section 32AC of the Act to power generating companies and DISCOMS, may be considered.
Keeping in view the large funding requirements for developing 100 Smart Cities, earmarked allocations by way of ‘grants-in-aid’ from the Consolidated Fund of India to the States for devolving to municipalities involved in developing smart cities should be considered. To provide access to debt markets for the cities to fund funding water supply, sanitation, solid waste management and other municipal/urban services, reviving the current municipal bond market through budgetary allocations to cover portion of project costs to be borne by municipal authorities on issue of municipal bonds, notification of such bonds under Section 80CCF of the Act are some other recommendations.
Roads, Ports, Railways, Linkage Projects and Infrastructure Service Providers
Creation of a national road infrastructure fund providing interest subsidy loans, for reducing the financial stress on concessionaires is recommended. Dedicated budgetary allocation should be made earmarked for public grant (or through VGF) in road and rail road linkages PPP projects connecting mines and industrial zones to ports. Extension of benefits of Section 80-IA of the Act to the incidental and ancillary support services to Infrastructure Facilities (as listed under 80-IA) may be considered. Further to introducing FDI in key areas, collaboration with state governments for modernisation of railways should receive budgetary support. In the previous budget, the Finance minister made allocations for metro projects in two cities. With the focus on development of urban infrastructure, it is recommended that such allocation be made for development of metro rail projects in other cities as well.
Oil & Gas
Extension of tax holiday under Section 80-IA of the Act to exploration and production of natural gas, extension of deductions under Section 42 of the Act for prospecting, exploration or production expenditure incurred by Indian companies from blocks abroad, extension of duration of benefit under Section 80-IB of the Act from 7 years to 10 years, extension of such benefits to natural gas under Section 80-IB irrespective of the round of NELP under which the exploration, prospecting or production contract was awarded and exemption from minimum alternate tax are some of the expectations from the oil and gas sector.
To attract greater private participation in the urban infrastructure sector, a change in the viability gap fund regime, by which instead of 20% of the project cost, amounts up to 30% of the total project cost may be financed through VGF, can be considered. The tax holiday under Section 80-IA of the Act should be extended to such urban infrastructure projects by specifically including all such urban infrastructure projects in the definition of ‘infrastructure facility’ and not limit it to water supply project, water treatment system, irrigation project, sanitation and sewerage system or solid waste management system.
– By Amitabh Sharma, Partner, Khaitan & Co