Give tax offsets to loss-making SPVs

The upcoming Budget is likely to be a reformist and a populist one, given that the Lok Sabha elections are scheduled to be held next year.

The Budget is expected to allay some of the concerns of the road, highway and port sectors.

The infrastructure sector (mainly ports and highways) are bleeding due to tax leakages at a group level.

Typically, the regulators awarding infrastructure contract require setting up of special purpose vehicle (SPV) for carrying out the project.

However, the players have multiple horizontal SPVs and are not able to set off the losses incurred in one SPV against the profits earned by other SPVs. The government could introduce a framework of fiscal consolidation, thereby easing the pressure of the industry players by lowering their overall tax costs.

A major concern of the infrastructure companies is the applicability of Minimum Alternate Tax (MAT). The normal provisions of the Income Tax Act provide tax holiday in terms of profit-linked exemptions.

However, the levy of MAT on infrastructure companies not only nullifies the very objective of tax holiday but also results into cash outflow during the initial period due to which the viability of projects is impacted. The government should fillip this industry by keeping these companies out of MAT or substantially reducing the MAT rate for these companies.

Another gap the Budget should address is the delay in completion of projects which have led to a huge amount of costs overruns for the government contracts in the road and port sectors.  The multitude of approvals for land acquisitions, environmental clearances and design approvals before commencement of the projects leads to substantial delay in the projects, leading to cost overruns.

Further, the major challenge faced by the port sector is the time lag in setting up ports and slow awarding process. It is estimated that a port development project under PPP method on an average takes 10-12 years from point of conceiving the project to the point of it being operational. There is also is an inherent risk as the project may be scrapped or delayed due to several factors such as change in government policies, etc. The government should address the overdue demand of the industry for a single-window clearance system for the infrastructure projects.

Further, the sector has voiced its concerns over the lack of infrastructure support and availability of funds.

In the ports sector, connectivity is not separate but an integral part of development; poor and inefficient connectivity can lead to a decrease in effective port capacity and result in deterioration of available infrastructure. 

An integrated transport policy or an institutional mechanism promoting inter-sector co-ordination is the need of the hour. Some steps that require urgent attention are the construction of dedicated freight corridor projects (railways and roads) and development of coastal shipping and inland waterways.

Kanabar is tax partner-infrastructure practice and Upinkudru, senior tax professional-infrastructure practice with Ernst & Young, India. Views are personal