A country’s infrastructure paves the way for its economic growth. In line with this, the government in its 12th Five Year Plan envisioned investment in infrastructure sector to upsurge to USD 1 trillion. With such ambitious growth plans and a pro-industry government at the helm of affairs, expectations from the debutant FM Arun Jaitley and his maiden budget are at an all-time high.
In the past, measures like liberalization of FDI regulations, extension of tax holidays and introduction of PPP model have provided the much required impetus to the infra sector. However, a lot remains to be done to incentivize investment and accelerate growth in this sector. Briefly discussed are some of the tax reforms that require Mr. Jaitley’s immediate attention.
Presently, tax holidays are available to infrastructure companies under the provisions of section 80-IA of the Act. However, the benefit of such incentive is negated due to levy of MAT during the incentive period. In order to reap the full range of benefits, the government should consider obliteration of MAT for infrastructure companies during the tax holiday period. Additionally, the government may consider extending the sunset period for such tax holidays. For example, an undertaking operating in the power sector can avail the tax deduction only if it begins generating power by 31.03.2013. Prolonging the tax holiday period will encourage setting up of more and more power plants thus bridging the gap between power demand and supply.
Infrastructure projects involve huge capital outlays with returns over long gestation periods thereby leading to funding being a key constraint for private players. An immediate action area for the government would be to facilitate the flow of funds and substantially reduce the interest burden on a sector which hugely relies on debt funding for its projects. The government should consider removing withholding tax on ECBs for infra companies and infusing further capital in public sector banks/infrastructure debt funds. In order to raise funds for the infra sector, the government may consider extending tax deductions to subscribers of long term infrastructure bonds. To further augment investment in infrastructure projects, restoring exemptions earlier extended in respect of incomes arising from infrastructure capital fund/company may be considered thereby leading to upliftment of the investor sentiment around the sector.
There is no denying that the infra sector is in dire need of reforms and dedicated tax and regulatory reforms will go a long way in amplifying the sector growth. However, to boost progress of the sector needs of both the public and private players require consideration. For example, currently benefits under the Act pertaining to carry forward and set off of accumulated losses and unabsorbed depreciation allowance in case of amalgamations or demergers are available only to public sector airlines. Extension of these benefits to private airline operators shall ensure that both the public and private airlines evolve at par.
While infrastructure as a sector is identified as an essential ingredient for the country’s economic development, there is no clarity on what all is covered under the rubric of infrastructure. Varied definitions exist under the extant regulations, namely, RBI, IRDA, income tax laws etc. The need of the hour is to provide a unified definition of infrastructure so that the tax benefits are extended to more sub sectors not yet included under the ambit of infrastructure.
Presenting a budget on the above lines will boost the sentiment in the sector and also restore the dwindling confidence of India Inc. and international investors and will project India as a viable investment destination as far as infrastructure is concerned.