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Building Foundation For 'Make In India'

In nutshell, a lot is riding on infrastructure sector and the Union Budget 2016 can be expected to have a larger focus on the same.

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"You and I come by road or rail, but economists travel on infrastructure", a famous politician once said. It can be said, not just economists but economies travel on infrastructure. The importance of infrastructure sector in the development of nation has been highlighted time and again.

The Government is leading by example by putting large investments in infrastructure - it invested Rs1.59 lakh crore during April-November 2015, which is 30% higher than the investments for April-November 2014. The Government's increased expenditure on infrastructure projects is a silver lining for growth of economy during 2015-16 as private investments were reduced due to stressed balance sheets and global slowdown.

In order to boost funding in infrastructure sector, the Reserve Bank of India has recently introduced framework on Rupee denominated Bonds issued overseas as well as revised framework for External Commercial Borrowings. To make financing more attractive, the Central Board of Direct Taxes has announced lower withholding of taxes @5% on interest income of Rupee denominated Bonds as a final tax and also exemption on certain related capital gains. The suitable amendments to this effect are likely to come in Budget 2016.

Last year, the government introduced new provision in respect of National Pension Scheme ('NPS') which will assist in raising additional funds for infrastructure. Now to ensure larger participation, provisions making NPS withdrawals tax exempt are expected to be introduced in upcoming Budget.

The Budget 2016 is likely to announce scheduled phase-out of corporate tax exemptions. This would expedite the investments in short term especially in infrastructure sector, since, for the companies completing their investments and commencing the production by 1 April 2017, all the existing exemptions would continue. Though the intention is to eliminate all exemption provisions, the Government is open and keen to evaluate and extend such benefit on case to case basis. One such recent benefit is three-year tax break announced for eligible start-ups under 'Start-up India' initiative. Further, the Government has also announced rationalization of corporate tax rates by bringing it down to 25% from present 30%. This will also give boost to infrastructure sector.

It is also expected that the accelerated depreciation would be brought down from present 100% to 60%. Since this will increase the tax outflow in first year due to reduced depreciation, such amendment may hamper the new investment in infrastructure.

Another critical area to watch out for in this Budget from infrastructure perspective is amendments under tax laws giving effect to some of the action plans recommended in Base Erosion and Profit Shifting ('BEPS') report. Infrastructure sector is anticipating millions of additional tax due to BEPS action plan. BEPS action plan intends to neutralize effects of hybrid instruments which will result into denial of interest expenditure or taxing of the same, not otherwise required. Further, it will also restrict some of the tax treaty benefits by ensuring prevalence of domestic tax law to overcome treaty benefits claimed by infrastructure players by splitting of contracts. BEPS has also expanded the scope of Agency PE, which will make more non-resident infrastructure companies to pay taxes in India. It will be interesting to see how Budget 2016 deals with recommendations provided under BEPS report especially from tax point of view, which will have a far reaching impact on infrastructure sector.

In nutshell, a lot is riding on infrastructure sector and the Union Budget 2016 can be expected to have a larger focus on the same. For an economy built to last we must invest in what will fuel us for generations to come. As they say, Rome was not built in a day.

With inputs from Prashant Deshmukh, Manager, Business Tax, Deloitte Haskins & Sells LLP

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.

Tags assigned to this article:
Budget 2016-17 infrastructure deloitte corporate tax

Pankaj Bagri

The author is Director, Business Tax, Deloitte Haskins & Sells LLP

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