The government tabled the Direct Taxes Code, 2010, in Parliament last Monday. This revised code takes over from the 'revised discussion paper' released last quarter, which reversed the sweeping changes proposed by the original proposals in the 2009 version of the draft Direct Taxes Code Bill (original code).

The impact of the revised code on the energy and infrastructure sectors varies with the reference point for comparison. Viewed from the perspective of the original code, the revised code has a host of welcome changes, signalling a climbdown by the government on various contentious issues, which caused considerable debate and anxiety. However, if one compares the revised code with the current legislation, the same provisions do reflect an increase in the tax cost.

The proposed and now repudiated gross asset tax is a perfect example of this glass half-full or half-empty phenomenon. The restoration of the book profit-based minimum alternate tax (MAT) from the proposed asset-based levy would come as a material relief, especially to the asset-intensive energy and infrastructure sectors. At the same time, the increase in the MAT rate to 20%, effectively two-thirds of the regular tax rate, has come as a bit of a nasty surprise.

Again, on tax holidays, the revised code provides significant relief in the form of a virtual status quo for existing projects, which currently enjoy a profit-based tax holiday. This provides fiscal stability to investment decisions made in the past, a feature of any sound fiscal policy.

The tax holiday benefit for new projects, however, would be diluted with the replacement of the profit-based incentive with the investment-linked incentive. While the investment-linked incentive would be fiscally beneficial to investors in the first three-to-five years on account of accelerated deductions, it would be economically evened out as lower deductions in the future, except for, of course the timing benefit associated with accelerated deductions.

The industry would need to factor in the diluted effect of the fiscal incentives when bidding for new projects, potentially increasing the tariff/costs for consumers of infrastructure services such as ports, roads, power and the like.

The proposals to drop the earlier provision of ring-fencing of tax losses, continuation of the site restoration benefits for the energy sector and reduction in the effective corporate tax rate (compared to the current rate) are some of the other positives for the industry.

Energy and infrastructure sectors require significant capital outlays in the coming decades, with enhanced private-sector participation the absence of the fiscal incentives will need to be replaced with improved user tariffs and regulatory framework to bring in investments.