Banks have urged the Union Finance Ministry to restore the tax exemption on income from investment in infrastructure projects, stating that removal of such exemption would discourage investments in these projects.

In Budget 2006-07, the Government had made changes to the income-tax law to make income from all existing, as well as future investments in eligible infrastructure-related businesses taxable. For this, the Government decided to omit the popular Section 10 (23G) from the income tax law. This change is to come into effect from April 1, 2007 and applicable for assessment year 2007-08.

Banks demand

With the budget exercise for 2007-08 already kicking off, the banks have now asked the Government to re-introduce Section 10 (23G). This provision exempted specified income by way of dividend, interest and long term capital gains of infrastructure capital funds or infrastructure capital companies from investments in shares and long-term finance to an enterprise wholly engaged in infrastructure business, housing, hotel or hospital industry.

Banks qualified as infrastructure capital companies under Section 10 (23G) as they are companies that make investment by way of acquiring shares or providing long-term finance to an enterprise wholly engaged in the business of providing infrastructure facility.

The Government had in budget 2006-07 highlighted that this exemption was intended to ensure low cost of raising capital for thrust area projects in an era of high interest rates and high tax rates. As the tax rate as well as the interest rate of borrowing of funds had come down, reducing the overall cost of projects, the Government saw no justification for continuing with the tax exemption.

Tax benefit

The Indian Banks' Association (IBA) has now submitted to the Government that at least the existing investments should continue to get tax benefit under this provision even if the exemption cannot be re-introduced.

"The re-introduction of Section 10 (23G) benefits would result in more finer pricing of loans to infrastructure projects. The borrower would benefit from lower cost of funds as banks may be willing to pass on some of the tax benefit to the borrower in terms of lower interest rate," said Mr B. M. Mittal, Chief General Manager of Punjab National Bank.

Bankers contend that removal of exemption under Section 10 (23G) would discourage new investments by banks in infrastructure projects, thereby diluting the government initiative to provide thrust to infrastructure in India.