Representative Issues to MoF - Tax Issues relating to Infrastucture companies

[jayaraman ravikumar]

Rapid growth of the infrastructure sector is essential not only to combat recessionary trends but also to promote growth of the eastern region, like other parts of India, at an estimated 9%. Moreover, substantial infrastructural deficits across various sectors like roads, ports, airports etc, persist in the country and particularly in the eastern region in terms of capacities as well as efficiencies in terms of delivery. In addition, the proposed sea changes in the incentives erstwhile granted to Infrastructure projects are very regressive and challenge the very survival of the projects which need to be addressed immediately.

Government which is focusing on infrastructure developments should ensure that all upcoming projects and new projects / expansions stand on their feet and get back to normal competitive conditions. A gradual and calibrated move will ensure that projects of national importance are not jeopardized and able to contain the cost within a reasonable limit. Hence following measures are either to be withdrawn in toto or modified with reasonable structural changes.

A. Direct Taxes

1. Direct Tax Codes:

     1. The code provides for a minimum alternative tax ( MAT)  calculated with reference to the " value of the gross assets. The MAT base is proposed to be shifted from book profits to gross assets.[ Tax on gross assets ]

     2. The rate concession given to banking sectors i.e. 0.25% should also be extended to Infrastructure projects companies

     3. All debt obligations existing as on the date should be allowed as deduction against gross value of assets for equality sake  

     4. Even wealth tax is imposed on "net wealth "and not on gross wealth".

INFRASTRUCTURE COMPANIES - the MAT proposal is " inequitable" for infrastructure companies which generally take about seven years to break- even.  Introducing such a concept will not hold good for infrastructure entities

Government should look at retaining the concept of MAT credit and that it should not be a final tax.  Under the Direct Taxes Code,  MAT will be a final tax and will not be allowed to be carried forward for claiming tax credit in subsequent years.

Recommendation

Tax on gross assets [GAT] should not be applicable to  infrastructure projects like Ports , Roads , Airports , IT parks , Power on BOT, BOOST , BOLT basis etc.,

Infra Investment companies should be exempt from GAT on their investments in Infra SPVs.

2. Tax holiday/ incentives for Specified Businesses.

Currently, the infrastructure sector is a key priority due to the scorching pace of India's economic growth. The government does its best to provide incentives to ensure the massive investment needed to fund growth. Most of these incentives take the form of tax holidays, which exempt projects from tax for the initial ten years. This leads to lower development costs and consequent lower user charges.

For infrastructure projects, the code proposes to withdraw all profit-based tax incentives in the form of tax holidays. This is replaced with an expenditure-based incentive, which implies tax exemption until the entire expenditure made by an entity is recovered. In a nutshell, to avoid paying tax, an entity must keep spending on developing infrastructural facilities a sum equal to its profits in the business. The day all capital and revenue expenditure is recouped, the entity would be subject to normal taxes.

The new incentive augurs well for businesses that are in a high-growth phase and need sustained investment for a number of years to come. However, new projects that do not require substantial funds after the initial few years will have reduced benefits.

In respect of the existing projects - profit linked incentives under section 80-IA have been grandfathered i.e. deduction shall be available for the balance period of the tax holiday. The mode of computation shall be as per provisions of the DTC (refer section 282 of the DTC). There is lack of clarity on the mechanism for computation of the deduction

 In respect of new projects - deduction shall be available in the manner laid out in thirteenth schedule of the DTC. The DTC seeks to replace profit-based tax holiday incentives with investment-based incentives. The taxpayer will be allowed to recover all capital and revenue expenditure as prescribed in the DTC. The period consumed in recovering all capital and revenue expenditure will be the period of tax holiday.

Recommendation:

GAT should not be made applicable during the period of tax holiday

Clarity is required on the mechanism for computation of the deduction, rate of depreciation

B Indirect Tax

1. Service Tax on Capital Dredging

While the importance of infrastructure development has been recognized in the tax policy by way of concession in respect of construction of ports, roads and similar critical infrastructures, there seems to be an anomaly in respect of capital dredging which forms a substantial part of the cost of building a new port or existing ports

Capital dredging involves removal of materials previously undisturbed to facilitate new navigation canals or water projects. Such type of dredging is usually carried out before construction of any port or harbor. On the other hand, maintenance dredging is the routine periodic removal of materials from rivers, ports, harbors etc,

Recommendation:

Dredging is a highly specialized service with limited number of agencies possessing the knowledge and equipment which has led to substantial rise in the cost of dredging affecting the viability of new projects. Under these circumstances and keeping in view the broad objective behind exemption of construction of ports, it is necessary that dredging services, especially capital dredging required for new ports should be exempted from service tax.  

2. Liability of interest where CENVAT credit was wrongly taken but reversed by assessee before utilization : (Circular No. 897/17/2009-CX, New Delhi, dated the 3^rd September, 2009.)

The CBEC has issued a circular clearing the air on interest liability where cenvat credit was wrongfully taken but reversed before utilization. "As per rule 14 of Cenvat Credit Rules, 2004, interest would be recoverable, when credit has been wrongly taken, even if it is not utilized," the CBEC said in a circular.

The directive comes after the Supreme Court recently dismissed an appeal by revenue department in a case involving Maruti which had taken cenvat credit but not utilized it. The appeal was against a high court ruling that the assessee was not liable to pay interest on the credit taken but not utilized. .

As you will observe, the CBEC has decided that the Court decisions need not be followed because :

Tribunal decision and the High Court judgment referred to above, were delivered in the context of erstwhile Rule 57I of the Central Excise Rules, 1944

The Supreme Court order under reference is only a decision and not a judgment.

Rule 14 of the CENVAT Credit Rules, 2004, is clear and unambiguous in the position that interest would be recoverable when CENVAT credit is taken or utilized wrongly, even if it has not been utilized.

We are of the considered opinion that :

The Court decisions were well reasoned and based on principles that deserve respect

Subsequent court decisions in following cases reaffirmed that interest should not levied where CENVAT credit is reversed before utilization

Punjab & Haryana High Court delivered in the context of Rule 12 of the CENVAT Credit Rules, 2001-02 and Rule 14 of CENVAT Credit Rules, 2004.

The High Court in its judgment delivered on July 3, 2009 in IND-SWIFT LABORATORIES LTD. Versus UNION OF INDIA [2009 TMI - 34688 - PUNJAB & HARYANA HIGH COURT ] held 11. Reliance of respondents on Rule 14 of the Credit Rules that interest under Section 11AB of the Act is payable even if CENVAT credit has been taken. In our view, said clause has to be read down to mean that where CENVAT credit has been taken and utilized wrongly, interest should be payable on the CENVAT credit taken and utilized wrongly. Interest cannot be claimed simply for the reason that the CENVAT credit has been wrongly taken as such availment by itself does not create any liability of payment of excise duty.

A similar view was taken by the CESTAT, Chennai Bench in 2009-TIOL-428-CESTAT-MAD wherein the Tribunal held, The wordings of Rule 12 of the CENVAT Credit Rules "taken or utilized" may deserve to be interpreted only as "taken and utilized".

No revenue implication is there when credit is taken but not utilized

The rigid stand of CBEC will only lead to harassment at the ground level and lead to litigations that the Government will lose

The litigations will impose unnecessary costs and unnecessarily burden the judiciary  

Recommendation :

The stand taken by CBEC vide the circular no 897/17/2009-CX, dated 3^rd Sep 2009should be reversed with immediate effect

3. Key Infrastructure sectors to issue concessional declaration forms under CST Act 1956 :

At present sec 8 (3)(b) of CST Act 1956 , the following entities are eligible to get registered under the Central Sales Tax Act 1956 and avail concessional declaration forms and reduce their cost of inputs and capital goods .

     Resellers

     Manufacturers

     Processing of goods for sale in mining , generation of power sectors

     Packing materials for sale of goods

     Telecommunication network

GOI was kind enough in including Telecommunication network for concessional procurements on interstate basis against declaration forms effective from 11^th May 2002 which is basically a service sector. At the initial stage of construction of any infrastructure facility, the cost may go up due to many factors and procurement of inputs / capital goods which would account more than 60% of the project cost is one of the major areas where optimization of cost is not possible unless tax structure is considered favourably by the government.

 Recommendation:

 When international barriers are declining, the port sectors especially, are sure to get boost in coming years and one way of making it to extend the benefit of providing declaration forms for procurement of materials to keep the project cost optimum and competitive.

 Government has already taken adequate initiatives like phasing out of CST to migrate onto a full pledged GST and as an interim measure to contain the cost of long gestation project like Ports, Sec 8(3) (b) may kindly be amended to include the left out key infrastructure sectors which are backbone for growth of economy and global competition like the timely recognition of Telecommunication network from 11^th May 2002.