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I-T sops for infrastructure investment?
October, 17th 2007
It certainly is an excellent idea

Raising funds for infrastructure development is an important issue on which the government needs to deliver. The required sums are large as projected by various bodies. The latest projection is from the Planning Commission, which quantifies the required investment over the next five years at $492 billion, 70% of which is expected to come from the public sector. The finance ministry should push for any ideas that will help raise these resources. In this context, an increase in the tax-free investment limit with the increase being invested in infrastructure bonds is certainly an excellent idea.

If these bonds are structured in an attractive manner, the response from investors is likely to be encouraging as there are currently relatively few vehicles for investment. The recent increase in savings has mostly been channelled into insurance products, bank deposits and mutual funds.

Vinayak Chatterjee
Feedback Ventures
While the returns have been good over the past few years, the retail investor is wary of increased exposure to equities. On the other hand, deposit rates offered by banks are coming down. In such an environment, the retail investor would be prepared to put money into a long-term instrument with fixed returns that are at a slight premium to what banks are able to offer.

Any objection to this proposal will, of course, point to the fact that it is deficit enhancing as compared to, say, an increase in taxes. However, at a time when tax compliance is improving, it will be a mistake to try and push for higher taxes. Stability in the income tax regime has been an important ingredient in nurturing better tax compliance. Instead of raising taxes, the finance ministry should seek savings in some unproductive areas to accommodate higher spending on infrastructure.

Infrastructure spending by the public sector also has the benefit of crowding in investments from the private sector. The private sector will have more confidence in contributing its 30% if it perceives the government as a serious partner in infrastructure development. If, on the other hand, the government fails to raise adequate resources, the business as usual scenario is likely to continue and infrastructure bottlenecks will be the order of the day.

It'll hurt the credibility of the tax regime

The government is deliberating on enhancing the income tax exemption limit for individuals by Rs 50,000, if the additional investment is made in power (infrastructure) bonds. This is a welcome step for mobilising resources to bridge the $40 billion resource gap in infrastructure during the Eleventh Plan period.

While the proposal will serve the dual purpose of providing relief to taxpayers and mobilising funds for the infrastructure sector, it is useful to look into the nitty-gritty of such a proposal.

The creditability of the tax regime, which is of fundamental importance for the effectiveness of tax incentives, is affected by such short-term measures. One recalls that a similar scheme was in vogue until 2004-05. Under the scheme, individual taxpayers were given tax exemption for investments up to Rs 1 lakh pa and the maximum investment in infrastructure bonds had a limit of Rs 30,000. Revisiting the scheme so soon does cast aspersions on the creditability of the tax regime and will be seen as a temporary measure. Also, the tax-expenditure estimates should take into account the effective cost of such a scheme for the government.

Mahesh C Purohit
Director, FPEPR
From the point of view of the taxpayers, it is important to remember such a step is regressive; the rich benefit more. It may be worthwhile to introduce a progressive scheme of exemption wherein 50% tax exemption is given for invested funds in the top bracket, 75% in the middle and 100% in the lower income group. It is important to ensure that such a scheme is non-discriminatory for both the private players (as against public sector) as well as the small players (as against big players) in the infrastructure sector.

Finally, the suggestions made by the FM in his budget speech of 2007-08, regarding the use of the balance of the National Small Savings Fund due to reduced obligation of the states and also the use of a small part of the foreign exchange reserves (without the risk of monetary expansion), especially to meet the cost of foreign exchange components of such projects, are extremely important.

Let us hope the sub-committee headed by Montek Singh Ahluwalia will pay heed to these observations before fine-tuning the proposal.
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