Nabin Ballodia, Director, Tax, KPMG
The roads/ highways sector in India forms a critical part of the
overall infrastructure space and is significant to any hopes that the
Government may have to revitalize the economic activity. The
Government has embarked upon an ambitious plan of augmenting existing
network of national and state highways besides development of new
expressways. It is estimated that an investment of approximately USD
50-60 billion is required to improve road infrastructure in India. In
order to make an investment of this magnitude, the Government,
understandably, is aggressively pursuing 'Public-Private Partnership'
Model.
However, the Government needs to take a serious look at the current
tax provisions in order to present a viable risk return profile to the
private investor. One of the major anomalies in the current tax
provisions that require immediate attention is the applicability of
Minimum Alternate Tax ('MAT') to companies engaged in developing roads
and highways. While section 80IA of the Income Tax Act, 1961 ('the
Act') provides tax holiday for 10 out of 20 years to such companies,
they are still liable to pay MAT at the rate of 11.33%. In effect, the
incentive provided by section 80IA is diluted to a great extent by
applicability of MAT. The Finance Minister should consider correcting
this anomaly in order to attract further private investment in the
road sector.
One of the major initiatives taken by Government includes broadening
of existing network of national and state highways. While the project
includes adding additional lanes, construction of over-bridges and
relaying the entire stretch, there is considerable ambiguity over the
status of refurbished highway in the context of applicability of
section 80IA. It is important to note that tax holiday under section
80IA is available only in respect of 'new' infrastructure facility.
The dispute is whether the refurbished highway will be considered as a
'new' infrastructure facility or not. The industry hopes that the
Finance Minister would clarify this issue and include broadening of
existing highways within the ambit of section 80IA.
The government should also consider restoring the neutrality of
corporate restructuring transactions in the infrastructure space. As
per the current tax provisions, if the undertaking which is engaged in
developing/ operating the highway is transferred before the expiry of
tax holiday period (10 out of 20 years), the transferee is not
entitled to the tax holiday for balance number of years. Such a tax
regime virtually stubs out an investor who, although interested in
developing the project, may not be keen to stay invested for a longer
duration of time, especially after completion of the construction
phase.
As far as indirect taxes are concerned, there is a long standing
dispute in relation to applicability of excise duty on pre-fabricated
structures (pre-stressed concrete girders, slabs etc.) constructed at
casting yards away from site during construction of road. The industry
contends that the structures are customized according to a specified
project and are therefore not liable to excise duty. However, this
argument does not find favor with the revenue department. Further,
benefit of concessional rate of central sales tax of 2% on production
of Form C is not allowed on inter-state purchases for goods used in
road construction projects. Both of the above substantially increase
the cost of the project. The industry is hopeful that the Finance
Minister would look into this matter and provide suitable relief to
the industry.
The scale of activity in the road/ highways sector is bound to
increase, given that the higher echelons of the Government have made
clear that it attaches top priority towards investment in
infrastructure space, particularly roads and highways. However, a
timely move to set right, the anomalies in the current tax provisions
and provide further fiscal incentives would certainly go a long way in
enabling further investment in the road sector.
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