India has the second largest road network in the world, aggregating to about 33 lakh kilometers. Despite this proud achievement, the demand for building new roads and improving existing roads seems to be ever increasing. This can be attributed mainly to the rising population and an unprecedented step-up in the demand for automobiles in the country.
The Planning Commission recently opined that investments in key sectors like roads, railways and ports will be significantly lower in the 11th Five Year Plan. The projected investment in the road sector is lower at `2.78 lakh crore compared with `3.14 lakh crore in the original projections for the 11th Plan period, ending March 2012 as per the Commission. The decline in investment has been said to be due to shortfall in the awarding of road projects by NHAI during the first three years of the Plan. On the Transport Ministry’s recent attempts to achieve completion rate of 20km of highways per day, the Plan Panel has indicated that it is likely to increase the investment during the last two years of the Plan, but the major build up in expenditure will only be in the 12th Plan (2012-17).
Perhaps, one can question whether enough effort is being put to help the road infrastructure improve at a galloping pace. However, on the tax and regulatory front, over the years, the Government has done its bit to encourage public and private partnerships in developing, operating and maintaining roads.
As far as foreign direct investment (FDI) is concerned, the Government permits FDI upto 100% in the road sector which helps to attract foreign participants into the country.
Section 80-IA of the current Income-tax Act, 1961 (IT Act) provides for a 10 year tax holiday to an undertaking engaged in developing, or operating and maintaining, or developing, operating and maintaining any ‘infrastructure facility’ subject to satisfaction of certain conditions. For the purposes of this deduction, the term ‘infrastructure facility’ has been defined to specifically include:
The tax holiday for such road and highway projects is available for any 10 consecutive years out of 20 years beginning from the year in which the undertaking develops and begins to operate the infrastructure facility (i.e. the road, bridge or highway).
Certain important conditions need to be fulfilled for claiming this deduction:
• It should be a company registered in India or a consortium of such companies;
• The company should have entered into an agreement with the Central or State Government or a local authority or other statutory body for the developing, operating and maintaining, or developing, operating and maintaining the infrastructure facility
• The infrastructure facility (road, bridge or highway) should be a ‘new’ infrastructure facility
• A certificate from an accountant certifying the deduction must be obtained.
As regards the condition of infrastructure facility being a ‘new’ facility, recently This was a welcome clarification and would help to mitigate potential litigation on this front. The Circular however clarified that a mere relaying of an existing road would not be classifiable as a new infrastructure facility.
From April 1, 2012, the proposed Direct Taxes Code, 2010 (DTC) will replace the five decades old IT Act. Under the DTC, there is a paradigm shift from the current profit-linked 10 year tax holiday to an investment-linked incentive scheme. The investment-based tax incentive regime provides for deduction of normal operating and finance expenditure as well as capital expenditure (excluding expenditure on acquisition of land, goodwill or financial instrument) from the gross income. Thus, the investment-linked incentive essentially provides for a tax holiday for the period till the entity recovers its entire capital and revenue expenditure (other than land, goodwill etc).
The tax holiday for a road or highway project eligible under section 80-IA as on March 31, 2012 would be grandfathered for the balance period under the DTC. In other words, such a project would continue to be eligible for profit-linked tax holiday under DTC but only for the balance tax holiday period out of the total 10 consecutive years of tax holiday.
The depreciation on roads constructed whether on ownership, or on BOT (Build-Operate-Transfer) basis have also been a matter of debate. The Pune Tribunal in a case of Ashoka Info (P) Ltd had held that license granted for collection of toll on a road constructed on Build, Operate and Transfer basis is an intangible asset eligible for depreciation at the rate of 25%. The Mumbai Tribunal in another case of Maharashtra State Road Development Corporation Limited held that roads, flyovers bridges etc., constructed and owned by the assessee and utilised in its business of providing infrastructure constitute plant and entitled to depreciation at the rate of 15% applicable to plant. Further, in another case of Tamil Nadu Road Development Co. Ltd., the Chennai Tribunal held that depreciation on roads can be claimed only under the category of ‘buildings’ at the rate of 10%.
However, the DTC contains a specific provision to allow depreciation on project assets constructed on BOT basis even if the taxpayer is not the legal owner thereof. Depreciation rate has been prescribed at 15% where the benefit is for a period of 10 years or less, and 20% where the period is more than 10 years. This should help to put the controversy at rest on this issue.
Another development which the road sector players may be interested in is the advent of Limited Liability Partnership (LLP) in India. A bidding entity is usually required to form a Special Purpose Vehicle (SPV) to bid for a road or a highway project. This SPV is usually in the form of a ‘company’, not only because a tax holiday is available only to a ‘company’ but also because the concession agreements would specifically require only a company to bid.
It would be interesting to see if the DTC, when finally enacted, makes suitable amendments to clearly permit an LLP to claim the investment based incentive. If yes, it can be expected that such entities would be widely used especially due to some tax advantages like Dividend Distribution Tax. However, clarity on FDI in LLP, which is long outstanding, would certainly help such entities to gain fast-track recognition in India.
Undoubtedly, the strength of the transportation and infrastructure sector has a direct bearing on the country’s GDP growth. With this perspective, one does hope that the development of road infrastructure in the country is put on the fast track. Simplifying some of the tax and regulatory complexities could certainly act as a catalyst in encouraging the private sector to participate with a lot more belief and certainty.
The post News For Roads and Bridges Infrastructure Sector – April 2011 appeared first on EPC World.