Historically, tax policy in India has been used as an effective tool to channel investments into the desired sectors, by way of tax holidays. Nonetheless, at times the relevant section of the Income Tax Code does not (or is made not to) make a reading consistent with the objective of providing the holiday. This results in the industry facing surprises in tax assessments leading to protracted litigation.
Given the laudable and purposive objective, the government would do well to clear the air on the key issues faced by the industry in availing the exemptions/deductions, especially after having committed huge capital based thereon. Some such obvious cases have been identified below.
Section 80-IA Tax Holiday
Modernisation/overhauling of infrastructure facilities
With the objective of incentivising the infrastructure sector, Section 80-IA of the Income-tax Act, 1961 (‘the Act’) provides for tax holiday in respect of income arising out of development or operation and maintenance of an infrastructure facility. One of the conditions prescribed for availing the holiday is that the taxpayer should enter into an agreement with the statutory body for the development or operation of a new infrastructure facility.
Now, let’s take the case of airport modernisation or conversion of two-lane roads into four or six-lane roads or a complete modernisation of existing sewage/irrigation facility. Undoubtedly, such projects are meant to bring into existence a completely modernised infrastructure facility, and hence, should be eligible for the tax holiday.
In the context of erstwhile Section 10(23G), which provided benefits for investments in infrastructure companies, the Central Government has granted approvals for companies engaged in modernisation/expansion projects. Clearly, the objective of the government has been to treat modernisation/overhauling projects at par with Greenfield projects.
A clarification to the effect that modernisation/overhauling of an infrastructure facility would qualify for Section 80-IA deduction would provide the requisite fillip for investments into the sector.
Pure “developer” of infrastructure facility
There is also ambiguity in the case of mere developers of infrastructure facilities. Whilst there is no doubt that a mere developer (who does not subsequently operate or maintain the facility) is also eligible for tax holiday, the provision relating to determining the tax holiday period makes an ambiguous reading. The section provides that the holiday period shall begin from the year in which the enterprise develops and begins to operate the infrastructure facility. Doubts have been raised and matters have been taken to appellate authorities as well, as to whether a mere developer should be eligible for the benefit, since he would never begin to operate the infrastructure facilities.
Though authorities have held in favour of taxpayers, clarifying this position will bring much needed certainty. Also, it should be clarified that milestone payments received during the course of development are also eligible and the holiday period does not commence only upon the development being fully completed.
Tax holiday for gas exploration
Last year, in the notes to clauses of the Finance Bill, a subtle clarification was introduced which had the effect of denying tax holiday for exploration of natural gas. After a lot of hue and cry, the Finance Minister clarified that the availability of tax holiday will be determined by the courts, as matters were pending before them.
The policy documents floated at the time of inviting bids from investors for oil and gas projects provided for the tax incentive. Further, the same was manifested at the time of introducing the provisions in the Act. Clearly, now there should be no case for investors being left to a long judicial process for getting what they were already promised and on the basis of which they committed huge investments. An appropriate clarification would boost the morale of investors for the upcoming rounds of NELP/CBM auctions.
DDT exemption for SEZ developers
SEZ developers are entitled to exemption from Dividend Distribution Tax (DDT). Section 115-O(5) provides exemption with respect to dividends declared out of “current income” of the taxpayer. Now, this leads to ambiguity as to whether dividends declared out of accumulated profits would be eligible for DDT exemption, as they are out of income of earlier years. The intent clearly seems to exempt SEZ income from DDT, whether out of current or accumulated profits, and this needs to be clarified.
SEZ units – computation of deduction u/s.10AA
In the course of debate on the interim budget in February 2009, the Finance Minister had clarified that deduction u/s.10AA will be computed by considering total turnover only of the SEZ unit in the denominator and not the total turnover of the taxpayer. This was to rectify an anomaly and enable SEZ units, having other businesses, to claim full deduction of SEZ profits and not a proportionate deduction. A suitable amendment to S.10AA in the budget would give legal sanity to the stated intention.
This should provide the necessary impetus to the business community for investing in the desired sectors and should also provide an environment of certainty and clarity on the tax cost of doing business.
By Vishal Shah, Associate Director and Smit Sheth, Manager, Tax & Regulatory Services, PricewaterhouseCoopers
( Views expressed are personal)
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