Sectoral Impact: Infrastructure

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2 Sectoral Impact: Infrastructure Infrastructure reforms are essential in order to boost investment and provide a much-needed fillip to economic and industrial growth in India. While investment in infrastructure has gained significant momentum over the last few years, the deficit continues to remain large. With a view to address this shortfall, the Indian government s Twelfth Five Year Plan ( ) had set a target of investing USD 1 trillion over five years. However, time and cost overruns continue to pose major challenges to attracting sufficient investment in infrastructure. The Finance Minister, Arun Jaitley, has provided a big thrust to the infrastructure sector in the Union Budget and proposed a number of welcome measures. Some of the key measures announced for the infrastructure sector are highlighted below. 1. Direct Taxation 1.1 Rates of Tax No changes proposed in the tax rates for any taxpayer (corporate and non-corporate). Surcharge and education cess continue to be levied at the same rates. 1.2 Dividend Distribution Tax Distribution of dividend by companies to its shareholders and by mutual funds to unit holders attracts Dividend Distribution Tax (DDT) at %. Presently, there was some ambiguity about the amount on which the DDT was to be calculated. That is, whether DDT should be calculated on the amount eventually distributed to the shareholders/unit holders or whether the amount distributed should be grossed up. It is proposed to be clarified that DDT should be calculated by grossing up the amount of dividend distributed to the shareholders/unit holders. 1.3 Concessional rate of tax on dividends from foreign companies The Income Tax Act provides for a concessional rate of tax of 15% on dividends received by an Indian company from foreign companies where the Indian company holds 26% or more voting power in the foreign company. This provision was applicable for dividends received until 31 March It is now proposed to extend the benefit of the concessional rate of tax perpetually by removing the sunset clause of 31 March Lower withholding tax for funding by way of long-term bonds The concessional rate of withholding tax of 5% on interest paid by an Indian company to nonresidents on borrowings made in foreign currency has been extended for borrowings made until 1 June It is further proposed to provide that the benefits of section 194LC would also be available to long-term bonds, including long-term infrastructure bonds. 1

3 It is also proposed that the concessional rate of withholding tax would apply even in case a PAN is not available. These amendments are proposed to be effective from 1 October Incentive for investment in plant and machinery In order to encourage additional investment in the manufacturing sector, it is proposed to provide an additional deduction of 15% of the total investment in new plant and machinery to companies engaged in manufacturing activities. This benefit is available where the cost of new plant and machinery acquired and installed during the tax year exceeds INR 250 million. This benefit is available for the period from 1 April 2014 to 31 March The limit of INR 250 million will separately apply for each year. The deduction of 15% of cost of plant and machinery is over and above the depreciation allowed on the cost of plant and machinery. Under the present law, companies are eligible to claim additional deduction for 15% of cost of plant and machinery if the investment in plant and machinery made during the period 1 April 2013 to 31 March 2015 is INR 1 billion or more. The proposed incentive is separate from this incentive. However, the existing incentive and the proposed incentive cannot be simultaneously claimed. 1.6 Tax holiday for the power sector The Income Tax Act provides tax holiday of 10 years for undertakings engaged in generation, transmission and distribution of power. The tax holiday was set to expire on 31 March It is now proposed to extend the tax holiday to provide that taxpayers who would commence business of generation, transmission and distribution of power by 31 March 2017 will also be eligible for the tax holiday. 1.7 Corporate Social Responsibility Under the new Companies Act, 2013, companies satisfying certain criteria are mandatorily required to spend a certain percentage of their profit on Corporate Social Responsibility (CSR) activities. It is proposed to be clarified that the CSR expenditure of these companies will not be tax deductible. However, if the expenses are otherwise allowable as a deduction under any other provisions, the same would be allowable. 1.8 Special provisions relating to REITs and InvITs It is proposed that in order to promote socio-economic growth, two new categories of investment vehicles in the form of business trusts be created namely: Real Estate Investment Trust (REIT) 2

4 Infrastructure Investment Trust (InvIT) The units of these business trusts are required to be listed on a recognised stock exchange. For this purpose, a special tax regime for providing the way the income in the hands of such trusts is to be taxed, and the taxability of the income distributed by the business trusts in the hands of the unit holders, is proposed. Interest income earned by the business trusts from an Indian company in which the trust holds controlling interest (SPV) is not liable to tax in the hands of the business trust. When the trust makes payment of interest to unit holders, it is subject to withholding tax: If interest is distributed to a 10%; and If distributed to a 5%. In case of interest on External Commercial Borrowings by a business trust, withholding 5% would apply. Capital gains tax in the hands of the unit holder on transfer of units of the business trust, if Securities Transaction Tax (STT) is paid is as under: Long-term capital gains will be exempt. Short-term capital gains will be taxable at the concessional rate of 15%. SPVs are required to pay distribution tax on income distributed by way of dividend to business units. However, this would be exempt in the hands of the trust as well as the unit holder. Business trust will not pay distribution tax on income that it received from SPVs, distributed by way of dividend to unit holders. Capital gains on disposal of assets by the business trust will be taxable in its hands at the applicable rate. The distribution of the capital gains income will be exempted in the hands of the unit holders. Income other than that mentioned above will be taxable in the hands of the business trust at the maximum marginal rate. When the sponsor transfers the shares in the SPVs in lieu of the units of the business trust, the same will not be considered as transfer. However, when the sponsor transfers the units of the business trust, taxabity would trigger in the hands of the sponsor. The sponsor would not be able to take the preferential capital gains regime consequential to levy of STT. The cost of the units at the time of sale will be the cost of shares and the period of holding will include the period of holding of the shares. It is proposed that a return is required to be filed by the business trusts. 3

5 Transfer Pricing 1.9 Roll-back mechanism introduced in the Advance Pricing Agreement (APA) Scheme APA negotiated for succeeding five years can be applicable to the previous four years also from the first year to which the APA relates. Detailed rules, specified circumstances and conditions are expected to be prescribed separately. The proposed amendment will take effect from 1 October The roll-back will save litigation costs, reduce the pendency of appeals and also encourage taxpayers to apply for the APA scheme. The administrative mechanisms for APA would also be strengthened in order to expedite disposals of applications Clarifications for comparability analysis carried out for an international transaction Introduction of range concept for determination of arm s length price of an international transaction. The existing concept of arithmetic mean will continue where the number of comparables is inadequate. Use of range will shield the arm s length price from variations on account of extreme values. Furthermore, use of multiple-year data would be allowed in comparability analysis. This would iron out differences on account of different product and industry lifecycles and yearly fluctuations. These provisions are not reflected in the Finance Bill. It is expected that these changes will be given effect soon by amending the Income Tax Rules. The above provisions of use of range and multiple-year data will align Indian transfer pricing regulations with global best practices. It would also reduce tax disputes and litigation going forward. These changes were on the wish list since the introduction of transfer pricing regulations in India, and are welcome proposals providing much needed relief to taxpayers. 2. Indirect Taxation 2.1 Service Tax Rate of Service Tax remains unchanged at 12.36% (including education cess). Rules to be prescribed for change in the method of calculation of taxable value in case of export/import transactions. (Following amendments would be effective 11 July 2014) Continuation of service tax exemption on services provided to government, local authority or governmental authority only pertaining to water supply, public health, sanitation, conservancy, 4

6 solid waste management or slum improvement or up-gradation. Going forward, there will be a restriction on transfer of credit by a large taxpayer unit from one unit to another. A Resident Private Limited Company has been made eligible for filing applications before the Authority for Advance Rulings. The same is applicable for Central Excise and Customs legislations. Services provided by a Director to a body corporate is being brought under the reverse charge mechanism. The condition of payment of invoice value to service provider is being withdrawn for service tax paid under full reverse charge. (Following amendments would be effective from the date to be notified after Presidential assent) Mandatory fixed pre-deposit of 7.5% of the duty demanded or penalty imposed or both for filing an appeal with the Commissioner (Appeals) and 10% of the duty demanded or penalty imposed or both for filing the second stage appeal before the Tribunal. The amount of pre-deposit payable would be subject to a ceiling of INR 100 million. (Similar change introduced in Excise and Customs legislations.) An amendment in section 73 has been proposed to prescribe the time limit for completion of adjudication. A time limit of six months has been prescribed in cases where the limitation of 18 months has been prescribed. A time limit of one year has been prescribed in cases where the extended period of limitation of five years has been invoked. Powers have been removed to waive the 50% penalty imposable in cases where service tax has not been levied, not paid or short levied or short paid on account of suppression of facts or wilful misstatement. (Following amendments will be effective from 1 October 2014 unless otherwise stated) The valuation mechanism for a lump-sum price works contract other than original works simplified by providing a flat abatement of 30% as opposed to specified categories getting abatement of 40% and 30% based on the nature of works contract earlier. Changes in the rate of interest on delayed payment of service tax: Extent of Delay Rate (per annum) Up to six months 18% From six months up to one year 24% More than one year 30% E-payment of service tax is being made mandatory for all assesses. Point of taxation in respect of reverse charge will be the date of payment or first day that occurs immediately after a period of three months from the date of invoice, whichever is earlier. (Effective only to invoices issued after 1 October 2014) CENVAT credit on inputs and input services is required to be taken within a period of six months from the date of issue of invoice, bill or challan. (Effective 1 September 2014) 5

7 2.2 Central Excise Duty Peak rate of Excise Duty remains unchanged at 12.36% (including education cess). (Following amendments will be effective 11 July 2014) In case if price is not the sole consideration for sale of excisable goods and they are sold by the assessee at a price less than the manufacturing cost and profit, and no additional consideration is flowing directly or indirectly from the buyers to such assessee, the value of such goods shall be deemed to be the transaction value. In case of failure to pay duty as per return within one month from the due date of payment, the assessee would be liable to pay a penalty of 1% on the amount of duty not paid for the month or part thereof during which such default continues. (Following amendments will be effective from the date to be notified after Presidential assent) Settlement Commission can allow filing of application in cases where the applicant has not filed the returns after recording reasons thereof. Plant and equipment imported prior to 2008 for use in projects financed by the United Nations or an international organisation are now allowed to be transferred/sold/re-exported out of the project site subject to conditions specified. The same is applicable for Customs legislations. It is clarified that Excise Duty exemption available to goods supplied against International Competitive Bidding (ICB) contracts is also available to sub-contractors for manufacture and supply of goods for or on behalf of the main contractor (who has won the bid for the project through ICB) for execution of the project. Clarified that manufacturers of railway locomotives, tramway goods, wagons, etc. paying 6% excise duty are eligible for CENVAT credit. 2.3 Customs Duty (Following amendments will be effective 11 July 2014) Peak Rate of Basic Customs Duty (BCD) remains unchanged at 10%. Changes in the BCD on some key items: Sr. No. Items Old rate New rate Impact 1 Coking coal Nil 2.5% 2 Steam coal and bituminous coal 2% 2.5% 3 Anthracite coal & other coal 5% 2.5% 4 Metallurgical coke Nil 2.5% 5 Coal tar pitch 10% 5% 6 Steel-grade dolomite and steel-grade limestone 5% 2.5% 7 Stainless steel flat products 5% 7.5% 6

8 Additional duty of Customs in lieu of Excise (countervailing duty) on anthracite coal, coking coal and other coal is reduced from 6% to 2%. The requirement of certification by the Ministry of Road Transport (or National Highways Authority of India) for availing customs duty exemption on specified goods required for the construction of roads has now been removed. Clarified that road construction machinery imported duty free can be sold within five years of importation subject to payment of customs duty on the depreciated value subject to conditions specified therein and that individual constituents of the consortium whose names appear in the contract can import goods. 7

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