Developers see minimal pain from MAT increase

The increase in the minimum alternate tax (MAT) from 15% to 18% in this year’s budget is not a serious blow to development projects, say infrastructure companies.

The quantum of hike and the nature of the contractual agreement in some projects are a couple of reasons why.

Parvez Umrigar, managing director, Gammon Infrastructure Projects, does not believe the impact would be big. “I don’t think three percentage points will make a big difference to us. Moreover, we have clean energy projects which are exempted from tax,” he said.

Gammon has 18 development projects, which include roads, ports, hydro and bio-mass power projects.

MAT is the minimum tax companies are required to pay on their book profit and it was introduced to bring into the tax fold those profitable companies that did not pay any tax because of exemptions under various sections.

Infrastructure developers have exemptions under Section 80-IA. Finance minister Pranab Mukherjee in his 2009 budget increased MAT from 10% to 15%.

While the hike was earlier thought to be a big dampener, E Sudhir Reddy, chairman & managing director, IVRCL Infrastructures & Projects, concurred with Umrigar in that he saw no serious cause for concern. IVRCL has three road projects and one desalination plant.

An analyst with a domestic brokerage said according to his calculations, the increase in MAT would affect power projects only marginally.

“It will impact the net asset value of the projects by not more than 5%,” he said.

Moreover, some projects, especially in power, have clauses that will enable the developer to pass on the burden.

Suresh Kumar, chief financial officer, Lanco Infratech, said in the power purchase agreements the company had signed it could get a refund for the differential in tax outgo through the ‘change in law’ clause.

“In our portfolio, about 70% of our projects are covered under these clauses. The exposure would be only for about 30% of the projects. Even among them, the hike would get absorbed if the project is being built on merchant basis,” he said.

However, companies agree that in the case of projects lacking these clauses, their projected internal rates of return will be affected by the hike. A consistent tax structure has been one of the constant demands of developers.

A Subbarao, chief financial officer, GMR group, said they would make a representation to the government. “But at the same time, we have to increase the operational efficiency of our projects to lessen the impact of the hike,” he said.

GMR has nine highways, eight power projects and three airports, of which only the GMR Hyderabad International Airport is subject to MAT.