The infrastructure sector is poised to grow consistently in the coming years, and a huge portion of the government’s stimulus package is aimed at sprucing up this sector. While this creates huge opportunities for non-banking financial companies focussed on financing projects in this domain, there are several direct and indirect tax issues for such NBFCs that the government needs to relook in Union Budget 2010-11.
Direct taxes
1. At present, tax at source is deducted at the rate of 10 per cent from the interest component that a borrower pays the infrastructure financing NBFCs. However, banking companies, co-operative societies engaged in banking business, public financial institutions, LIC, UTI, insurance companies and other notified institutions are exempt from this section. This puts infrastructure financing NBFCs at a disadvantage vis-à-vis the others and creates severe cash flow constraints (as it is, they operate on a very thin spread of interest income). Therefore, infrastructure financing NBFCs should also be exempted from TDS on interest payment.
2. When it comes to dealing with NPAs and doubtful debts or sticky advances, infrastructure financing NBFCs do not enjoy a level playing field vis-à-vis banks and other financial institutions (FIs), although they are also RBI-regulated entities and adhere to RBI guidelines.
At present, a provision in the I-T Act allows banks and financial institutions a deduction of up to 7.5 per cent from the gross total income for bad and doubtful debts. Alternatively, they have an option to claim deduction in respect of any provision made for assets classified by the RBI as doubtful assets or loss assets to the extent of 10 per cent of such assets. However, no such provisions have been made for infrastructure financing NBFCs. While they are to make compulsory provisions for NPAs, they are required to write off bad debts and satisfy other conditions to claim deduction. Therefore, infrastructure financing NBFCs should also be allowed to avail the above-mentioned provision of the Act.
Except for infrastructure financing NBFCs, the principle of taxing income from sticky advances in the year in which they are received is enjoyed by banks, FIs, state financial corporations and housing finance companies. In such a case it is only prudent to extend the same benefits to the infrastructure financing NBFCs too.
In addition, unlike banks and FIs, infrastructure financing NBFCs do not enjoy coverage under the SARFAESI Act and also cannot avail the services of the Debt Recovery Tribunals (DRTs). These facilities also need to be extended to infrastructure financing NBFCs so that they can operate more competitively
3. While most commercial vehicles are allowed high rates of depreciation and select specialised equipment meant for pollution control and renewable energy are even allowed 100 per cent depreciation, construction equipment whose contribution to the nation’s infrastructure development is immense, are denied that. Therefore, government needs to address this anomaly and at least allow construction equipment registered under the Motor Vehicles Act to avail the benefit of higher depreciation.
4. ECB has been a cost-effective source of long-term funds, particularly useful for funding infrastructure projects with long gestation periods. However, with the government withdrawing the tax exemption on interest paid on ECB loans, the cost advantage of raising funds through the ECB route has been compromised to a large extent. Keeping in mind the huge need of funds for infrastructure creation, the government may consider re-introducing this tax exemption.
5. The 2006 Budget announcement pertaining to removal of incentives on infrastructure financing under Section 10 (23G) of I.T. Act from fiscal year 2007-08 onwards is adversely impacting the process of infrastructure creation. Under section 10 clause 23G of I.T. Act for companies engaged in infrastructure projects by way of equity or debt or both, their net income from such investments (in the form of dividend or interest or long term capital gain) is exempt from tax. The withdrawal of this exemption was supposedly on the ground of a benign interest rate regime in 2006. However, the global economic situation changed thereafter. The world had faced a period of credit crisis. Government’s stimulus and policy measures helped companies in weathering the storm. But from now on, interest rates are expected to inch northward. Thus, re-introduction of the exemption becomes important at the present juncture. The tax benefit also enabled project developers to bring down their borrowing cost.
Removal of such a cushion has put a question mark on the viability of many projects and is acting as an impediment for future investments. The worst affected are the institutions like Srei who have already made substantial investment in infrastructure projects. Many banks who have also invested in investment projects have been affected. We request that this exemption be restored.
Indirect taxes
1. The government has imposed a partial levy of service tax on Hire Purchase and leasing transactions which actually does not make sense when the industry is already paying sales tax / VAT. Thus, for Lease and Hire Purchase transactions, such multiple taxation should be withdrawn and made subject only to VAT.
2. Infrastructure equipment contractors are allowed to import equipment for road construction paying nil import duty. This nil import duty benefit is not extended to Infrastructure Equipment Banks (IEBs) even though the end use of equipment remains the same. This benefit should be extended to IEBs as well. High-value imported construction equipment is a national resource that needs to be optimally utilised throughout their economic life. Allowing IEBs to import under NIL import duty will greatly help achieve that objective.
The writer is Chairman and Managing Director, Srei Infrastructure Finance Ltd.
