Opinion: MAT on Infrastructure Companies Should Be Abolished

(Shashidhar Upinkudru is a senior tax professional at EY India)

The stage is set for the biggest blockbuster of the year. Lowering of inflation, stabilisation of oil prices and improved sentiments have laid out a perfect landscape for the Finance Minister Arun Jaitley to present his first real Budget of the Modi government, and truly usher the sentiment "Acche Din Aanewale Hai".

Infrastructure acts as the catalyst to growth and the government acknowledges this. While the government is riding high on improved sentiments, a lot needs to be done in order to improve the ground realities if it really intends to make India, a world-class infrastructure hub. While, the prospects remain undeterred, the sector is yet to gather momentum vis-a-vis attracting large scale investments and long project gestation periods mainly due to policy related issues continue to plague the sector. Addressing these issues and meeting the expectations outlined below would provide the much needed boost in fostering economic growth.

The finance minister in this Budget should try to cater to the following expectations of the industry:

1. The tax treatment for expenses incurred on construction of roads/highways has been subject matter of litigation with divergent views from the Indian judiciary. In some cases, a deduction in the form of tax depreciation has been permitted by treating right to collect toll as an intangible asset on the basis that the ownership of concessionaire right vests in the person. However, in certain cases tax depreciation is granted by treating road to be a building. Further, CBDT had issued a circular clarifying the cost incurred by a developer towards construction development should be amortised over the concession agreement period. Divergent views emerging from Indian judiciaries and CBDT circular have created a tumultuous environment. A suitable amendment in the law should be brought about to reduce prolonged litigation haunting the industry.

2. Power is the critical infrastructure on which the socio-economic development of the country depends. So a clear and stable tax regime is bare minimum requirement of the investors/developers engaged in development of power plants. While the Indian Government has time to time extended the eligibility period for generation of power for claiming tax holiday (currently until 31st March 2017), the investors would welcome a move were the eligibility period is extended to say 31 March 2020, especially given the coal shortage and other problem being faced by the sector.

3. The tax holiday available to the infrastructure companies gets severely compromised since the companies are required to pay MAT (minimum alternate tax) on their book profit. In order to provide tax exemption to infrastructure projects in letter and spirit and to attract more and more investment in infrastructure sector, MAT on infrastructure companies should be abolished.

4. Infrastructure Investment Trusts (INViTs) could go a long way in unlocking capital of Developers and re-deploying the funds for new projects. However, the current taxation regime has not allowed INViTs to bloom. The finance minister should provide complete tax exemption (including MAT) to developers who want to migrate their assets/infra projects into an Invit. Further, Invit should be accorded a complete pass through status by exempting SPVs (Special Purpose Vehicle) from paying DDT (Dividend Distribution Tax).

5. Modernisation or expansion of existing infrastructure projects are the need of the hour. However, there is ambiguity in the Indian tax laws whether such modernisation or expansion projects qualify as "new" infrastructure facility in order to be eligible for income-tax holiday. Clarification on this issue would boost the investor sentiments and thereby lead to modernization of antiquated infrastructure of the country.

6. A long standing demand of the sector has been the introduction of a frame work for fiscal consolidation (as it exists in most of the developed economies) to negate the adverse impact of having to set up (due to regulatory requirements) separate SPVs for each project. The introduction of fiscal consolidation would help in improving the viability of the projects by allowing the developers to set off losses from one SPV against profits of another.

7. On an indirect tax front, while exemption from service tax is available on specified infrastructure projects such as airports and railways, similar benefits have not been extended to equally critical areas such as power and public transport sector. Similarly, while 'works contract service' provided by a sub-contractor to a main contractor for specified projects are exempt from service tax, other equally critical services rendered to main contractor (such as consulting engineer services) are not exempt. This leads to higher tax costs for such infrastructure projects. This sector would be closely watching the Budget for such extended benefits

8. A long standing industry demand has been inclusion of natural gas, which is essential for Power and fertilizer projects, as "declared goods" so that VAT (Value-Added Tax) rate on such goods is subject to a ceiling rate of 5 per cent. Given that the government is committed to introduce GST from 2016, the industry is hopeful that CST (Central Sales Tax) would be completely phased out in this Budget or proposed CST rate of 1 per cent.

While the intent is positive and the Indian economy has now started looking at the silver lining, government needs a firm resolve, big ticket reforms and execution orientation towards development of world class infrastructure if it is to "Make India", what it intends to.

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