To facilitate creation of urban infrastructure, the Government proposes to allow issue of tax-free bonds through State Pooled Finance Entities formed for raising funds for urban local bodies.
Year after year, the Budgets talk about incentives for infrastructure development. The Finance Minister, Mr P. Chidambaram, has referred to tax concessions for this purpose in Paragraphs 165 and 166 of his Budget speech.
Section 80IA of the Income-Tax Act, 1961 lists infrastructure facilities that are entitled to tax concessions. Industrial modernisation requires massive expansion of expressways, highways, ports, airports, etc. All along, incentives have been given for encouraging private sector participation in infrastructure development.
It is now clarified that Section 80IA will not apply to a person who executes a works contract entered into with the undertaking or enterprise mentioned in this section. If the person carries out the civil construction works himself, he will be eligible for tax benefit under Section 80IA. But if he enters into a contract with another person for executing work contract, he will not be eligible for the benefit.
Several Benches of the income-tax tribunal have interpreted Section 80IA to mean that even in such cases the benefit will be available (Patel Engg. Ltd vs DCIT 94 ITD 411 Mumbai). The Finance Act, 2007 annuls out those rul ings and to make matters worse, the amendment by clause 22 has been made retrospective from April 1, 2000, and will apply in relation to assessment year (AY) 2000-01 onwards.
Limiting the concessions
The Finance Act extends incentive benefits under Section 80IA for entities engaged in laying and operating cross-country natural gas distribution networks, including gas pipelines and storage facilities. This is a 10-year benefit and 100 per cent profits will be exempt. A five-year tax holiday has been provided for star hotels and convention centres with a seating capacity of not less than 3000. However, this benefit is available only to units set up in Faridabad, Gurgaon, Ghaziabad and New Delhi on condition that such hotels begin operations during the period April 1, 2007 to March 31, 2010. The idea is to help the successful conduct of the Common Wealth Games. The same benefit could have been extended to other major cities without limiting the concession to matters connected with the Common Wealth Games.
The sunset clause for an undertaking owned by an Indian company and set up for reconstruction or revival of a power generation plant has been extended up to March 31, 2008. This will help those projects which are already in progress. It may not help new units entering the power sector for the first time. Probably, the extension could have been given for three more years.
Section 35 (2AB) of the Act allows weighted deduction of 150 per cent for expenditure relating to in-house research and development. The concession is now extended for five more years up to March 31, 2012.
To facilitate the creation of urban infrastructure, the Government proposes to allow the issue of tax-free bonds through State Pooled Finance Entities formed for raising funds for a group of urban local bodies.
Deepak Parekh Committee Recommendations
The Finance Minister has talked of innovative financing for infrastructure and has referred to the recommendations for the Deepak Parekh Committee. The Committee has called for radical tax reforms and incentives in its report. It wants a deduction of 20 per cent on the amount invested by individuals through the initial public offer route or mutual funds in ultra mega power projects; the revenue loss would be Rs 1,000 crore.
The Committee notes that no dividend is likely to be available for distribution in the initial years of the infrastructure company. There is a shortage of risk capital. The Committee has also suggested that the benefit of exemption from long term capital gains tax should be extended to unlisted equity shares of companies engaged in infrastructure development.
At present, long term capital gains tax exemption is available only in the case of transfers of listed securities. If the Committees recommendations are accepted, the distinction between listed and unlisted securities will vanish at least in the case of shares of infrastructure development companies. It also wants to avoid the cascading effects of Dividend Distribution Tax (DDT) in the case of businesses entailing a multi-tier corporate structure with the holding company at the top. Many critics had highlighted the cascading effect of DDT highlighted by when it was first introduced. The Finance Ministry has been keeping a studied silence on these recommendations.
T. C. A. Ramanujam (The author is a former Chief Commissioner of Income-Tax.)