Construction companies will see their tax burden going up on account of the removal of Section 80 IA benefits.
Section 80-IA was introduced for encouraging private sector participation in the development of infrastructure, and not for persons/entities who were merely executing the civil construction work or any other works contract.
The new amendment will take retrospective effect from 1st April, 2000, and will, accordingly, apply in relation to the assessment year 2000-2001 and subsequent years. As a result, construction companies that merely execute development work will have to shell out a lumpsum towards past tax provisions.
Thus, in a case where a entity makes the investment and carries out the civil construction work will be eligible for tax benefit under section 80-IA. In contrast to this, an entity that enters into a contract with an eligible participant for executing works contract will not be eligible for the tax benefit under section 80-IA.
Construction contractors had so far been availing of the section 80IA benefit for projects awarded by infrastructure developers viz NHAI and state government agencies-awarded projects in roads & bridges, irrigation, water supply and sanitation.
These benefits meant that companies were paying a minimum alternate tax (MAT) of 11.2%. However, the clarification to section 80IA now stipulates that these companies pay the full tax rate of 33.66% from retrospective effect from 1st April, 2000.
In Rs crore
Source and estimates by Prabhudas Lilladher
Going forward, companies will have to provide for full tax. According to an analysis by brokerage firm Prabhudas Lilladher, these companies will have to adjust for this from their reserves thereby impacting their respective net worth.