Budget Connect+ Budget Infrastructure Impact

Transcription

1 10 July 2014 Budget Connect+ Budget Infrastructure Impact

2 Economic survey Highlights: The Indian economy has been witnessing a sub-5% GDP growth for the past two years. The slowdown is primarily due to domestic structural constraints, high inflation and external factors such as sustained global slowdown and Euro crisis. The GDP growth is expected to be 4.7% in FY14, marred particularly by the slowdown in industrial and manufacturing sectors (growth of 0.4% and -0.7%, respectively in FY14). After witnessing double-digit growth for five years till FY12, the services sector grew by only 6.8% in FY14. Agriculture and allied sectors grew by 4.7% during the year. The savings and capital formation rate fell to 30.1% and 34.8%, respectively in FY13. On the positive side, inflation has declined to 6% in FY14 from 7.4% and 8.9% in FY13 and FY12, respectively, but it continues to be above the targeted level. Gross fiscal deficit for FY14 declined to 4.5% compared to 4.9% in FY13. In FY14, the industry and infrastructure sector showed largely a downward-trend. The key reason for poor performance was contraction in mining and deceleration in manufacturing. Natural gas production plummeted due to declining production from the KG-6 basin. Slowdown in construction resulted in under-utilization capacity in the steel and cement sectors. Among infrastructure services, growth in freight traffic by railways, cargo handled by major ports, and the civil aviation sector (except import cargo) has been comparatively higher during FY14. Construction of national highways by the National Highways Authority of India (NHAI) posted negative growth of 33% during FY14 vis-à-vis a growth of 26.5% during FY13. Tax Alerts cover significant tax news, developments and changes in legislation that affect Indian businesses. They act as technical summaries to keep you on top of the latest tax issues. For more information, please contact your EY advisor. The following are some of the highlights related to the infrastructure sector in the survey: Infrastructure financing: In order to source long-term debt for infrastructure projects, the government introduced income tax-exempt infrastructure debt funds (IDF), which can be set up as a trust or as a non-banking financial company (NBFC). So far two IDF-NBFCs and five IDF mutual funds (MFs) have been operationalized. During FY14, India Infrastructure Finance Company Limited (IIFCL) mobilized long-term resources of INR16.1 billion primarily from multilateral and bilateral institutions, approximately 50% more than FY13. IIFCL was also allowed to offer financial assistance to PPP projects with the flexibility of tenors to be longer than other consortium lenders to spread debt repayments over a longer period, for improved liquidity, better viability, and reduced restructuring risk. The share of infrastructure in bank credit increased from 4.4% in 2004 to 13.9% in However, the rate of growth of bank credit to major infrastructure sectors declined from an average of 44.8% in FY12 to 17.7% in FY14 (with power sector having more than 50% share), as challenges in the sector made it difficult for some infrastructure firms to repay their loans. During FY14, FDI inflows into major infrastructure sectors registered a growth of 22.8% y-o-y to US$4.7 billion as compared to a contraction of 60.9% during FY13, with railway-related components, telecom, power, aviation and ports registering positive growth. The government accorded tax-free status to infrastructure bonds, with the aim to reduce the infrastructure deficit, especially in transport and energy infrastructure. During FY14, tax-free bonds of INR500 billion were issued to central public sector undertakings (CPSUs), for a period of 10, 15 and 20 years. The government has prepared draft guidelines for issuance of municipal

3 bonds in India to increase penetration in the infrastructure bond market. The government is promoting PPPs as an effective tool to bring private-sector investments into the sector. In the past few years, India has emerged as a leading PPP market globally. Till FY14, under the Viability Gap Funding (VGF) scheme for financial support to PPP in infrastructure, 178 projects costing INR887.0 billion have been granted approval with a VGF support of INR168.9 billion, of which INR14.6 billion has been disbursed. Challenges faced by the sector: Many firms had over-leveraged themselves during the pre-crisis boom and faced balance sheet distress during the economic downturn. This led to cost escalations, resulting in difficulties in loan repayments for companies and bad assets for banks. Banks have a tendency to lend on floating rate basis to address the problem of asset-liability mismatch which often results in further escalation of project cost. Sustainable monetary policies and well-devised credit enhancement mechanism are required to ensure continuous flow of funds. Challenges related to land acquisition and environmental clearances have led to stalled projects, while lack of integrated planning has led to operational inefficiencies in the sector. The role of the government needs to be distinctly divided into planning (government), contracting (specialized organization such as the National Highways Authority of India) and regulating (independent regulator) functions. Exuberant traffic projections during bidding have led project developers to bid aggressively. However, renegotiation process often fails and leads to legal issues when difficulties arise. Project risks need to be distributed into early stage (first year) and steady state (beyond first year) risks. Once the tolling revenues in the early stage are known, the risks decline sharply. Many PPP contracts have failed due to limited risk-bearing capacity of the private sector. Wherever PPP is not successful, an alternative strategy may be used, where the asset stays on the public balance sheet at first. Contracts would then be given out to first build the asset, then to toll the asset for one year (and produce toll revenue data) and then a long-term contract may be awarded. Shipping and ports: At the end of FY14, India s shipping fleet consisted of 1,213 ships with a capacity of 10.5 million gross tonnage (MGT). Out of this, 367 ships carrying 98% of the capacity cater to overseas trade, and the rest to coastal trade. In FY14, the major ports handled million tonnes (MT), 1.8% higher than FY13, while traffic handled by non-major ports increased by 9.6% y-o-y to 425 MT in FY14. Various policy initiatives have been undertaken in FY14 to enhance private investment, including new tariff guidelines which provide the port operator flexibility to fix tariff based on market conditions. Increased mechanization and systemic improvements have increased port efficiency. In FY14, average turnaround time and average pre-berthing detention time reduced by 13% and 43% y-o-y respectively, and average output per ship berth day increased by 6% y-o-y. Roads and highways: As of May 2014, India had a road network of 4.9 million km, comprising 92,851 km of National Highways (NHs)/expressways and 142,687 km of state highways. The government is upgrading and strengthening a total of 54,478 km of NHs under the National Highways Development Programme (NHDP). Till March 2014, work on a total of 21,787 km road has been completed under various phases of the NHDP. The National Highways Authority of India (NHAI) constructed a total of 1,901 km of roads in FY14. The government has taken various initiatives to finance NHDP projects, including allocation of a portion of the fuel cess imposed on petrol and diesel to the National Highways Authority of India (NHAI) and availing loans from World Bank (US$2.0 billion), Asia Development

4 Bank (ADB) (US$1.6 billion) and Japan Bank for International Cooperation (JPY32.1 billion). The NHAI has also permitted complete exit for equity investors from all concessions after completion of the project. The initiative is expected to release capital for other projects. The NHAI has also established a mechanism for speedy resolution of long pending disputes in road projects. To speed up projects under the NHDP, the NHAI has decided not to award projects till all approvals are in place to avoid post-bid delays and litigations. The government has made provision for standardized formats and collection of periodic data for effective monitoring of the land acquisition process. Railways: The Twelfth Five Year Plan aims to make railways the primary mode of transport in the country. Bearing this in mind, railways is currently focusing on building additional capacity, upgrading existing network, improving productivity and passenger safety and overall improvement in the quality of railway services. During FY14, freight loading was recorded at 1,050.2 MT, as compared with 1,008.1 MT during FY13, a y-o-y increase of 4.2%. Considering the paucity of budgetary resources to meet the significant investment demand in railways, the government has allowed FDI in suburban corridors, high speed train systems and dedicated freight lines. The government has also decided to take up future projects through PPP route. These projects may include capacity augmentation projects on congested routes, connectivity to new and upcoming ports, world class stations, private freight terminals and solar energy generation plants. Two high capacity dedicated freight corridors (DFC) are being undertaken which comprises Western DFC (1,499 km) and Eastern DFC (1,839 km) to increase transportation capacity, reduce unit cost of transportation and improve service quality. The Western DFC is completely funded by Japan International Cooperation Agency (JICA) and the construction work has commenced. For the Eastern DFC, which is to be developed through PPP route, 96% of the land has been acquired. The government has identified seven sections to develop high-speed rail corridors. A pre-feasibility study for the Mumbai-Ahmedabad corridor is being undertaken by the Indian Railways in collaboration with JICA. Aviation and airports: Existing airport infrastructure in metro and non-metro cities is being modernized and greenfield airports are being constructed to enhance the airport infrastructure in the country. The Twelfth Five Year Plan envisages an investment of INR650 billion at Indian airports, of which approximately 77% or INR500 billion is expected to be contributed by the private sector. In FY14, domestic and international airline passengers increased by 6% y-o-y to million. After a turbulent period of withdrawals and losses by some airlines, there are signs of revival in the sector with the entry of new players such as Air Asia and Tata-SIA Airline. In FY14, total cargo and passenger traffic handled at airports increased by 4% and 6% respectively. Modernization and capacity expansion projects at Kolkata, Chennai, Delhi and Mumbai airports were undertaken. Work at 33 out of 35 non-metro airports under development was completed. Power: The capacity-addition target for the Twelfth Plan is estimated at 88,537 MW. Against this target, 38,583 MW (43.6%) has been added till April Electricity generation for FY14 increased by 6% as compared to 4% in FY13. Fuelwise, generation from hydro, thermal and nuclear increased by 18.6%, 4.2% and 4.1%, respectively.

5 During FY14, the overall plant load factor (PLF), a measure of thermal power efficiency, declined to 65.6% from 70.1% during FY13. Four Ultra Mega Power Projects (UMPP) launched by Ministry of Power (targeted capacity of 4000 MW each) have been transferred to the developers and are at different stages of implementation. The government approved changes in mega power policy for provisional mega power certified projects, where the developers of provisional mega projects must tie up at least 65% of installed capacity through competitive bidding and up to 35% of installed capacity under regulated tariff. 100% FDI under automatic route for generation, transmission and distribution and trading of power and 26% FDI in addition to 23% FII under automatic route for power exchanges have been permitted. The Cabinet Committee on Economic Affairs issued a directive to Coal India Limited to sign fuel supply agreements for a total capacity of 78,000 MW, and approved pass-through mechanism for power purchase agreements. National Thermal Power Corporation (NTPC) has been allocated four coal blocks for 8,460 MW of power projects. During FY14, the Independent Coal Regulatory Bill was approved by the Cabinet and introduced in the Parliament. An executive order for setting up of coal regulation has been issued by the Ministry of Coal.

6 Union Budget Policy measures: Some key policy measures announced by the Finance Minister which could impact the Infrastructure sector are: Roads: Planning to begin for Urban Metro Projects for cities having population of more than 2 million. Government to encourage development of metro rail systems, including light rail systems under Public Private Partnership (PPP) mode. Corpus of Rural Infrastructure Development Fund (RIDF) is proposed to be raised by an additional INR 50 billion to INR 250 billion in the current financial year. New Schemes for development of airports in Tier I and Tier II to be launched through Airport Authority of India or PPPs. 3 P India, an institution to provide support for mainstreaming PPPs, to be set up with a corpus of INR 5 billion. Investment to be made in National Highways Authority of India (NHAI) and State Roads of INR billion for development of road network. Target construction of National Highway of 8500 km likely to be achieved in current financial year. Industry Corridors: Proposal to introduce ebiz platform, which will aim at making all business and investment related clearances and compliances available on a 24x7 single portal. Central Government Departments and Ministries to integrate their services with ebiz by 31 December Initial corpus of INR 1 billion allocated for National Industrial Corridor Authority, for development of the industrial corridors aimed at linking smart cities to transport connectivity. Power & Coal: A new scheme Ultra-Modern Super Critical Coal Based Thermal Power Technology to be started to promote cleaner and more efficient thermal power. PPP model to be used for developing 15,000 km of pipelines to complete gas grid across the country. Renewable Energy: Ultra Mega Solar Power Projects to be taken up in some of the specified states. Direct tax Proposal: Taxation regime for Real Estate Investment Trusts (REIT) and Infrastructure Investment Trust (InvIT) Securities and Exchange Board of India (SEBI) had earlier proposed consultation paper on draft regulations relating to two new categories of investment vehicles namely, Real Estate Investment Trust (REIT) & Infrastructure Investment Trust (InvIT) primarily included sectors: transport, energy, water sanitation, communication and social & commercial infrastructure. Two main categories of InvIT had been proposed (to be set up as trusts and registered with SEBI). The Budget proposes to provide following tax regime: Provisions have been announced to provide specific taxation regime for REITs/InvITs (referred as business trusts). Business Trust means a trust registered as an REIT/InvIT, the units of which are required to be listed on a recognised stock exchange in accordance with SEBI Regulations The listed units of a business trust would be subject to STT and would be accorded same tax benefits in respect of taxability of capital gains as equity shares of a company i.e. long term capital gains, would be exempt and short term capital gains would be taxable at the rate of 15%. However, the period of holding of units would be reckoned as long term only where the units have been held for 36 months or more. Sponsor will not be liable to capital gains arising at the time of exchange of shares

7 in SPVs with units of the business trust. However, sponsor shall be liable to tax at the time of disposal of such units and no preferential capital gains tax regime (consequential to levy of STT) will be available to sponsor in respect of units of business trust. For the purpose of computing capital gain, the cost of units shall trace back to original cost of shares to the sponsor. The holding period of shares shall also be included in the holding period of such units for the sponsor. Income by way of interest received by the business trust from SPV is not taxable in the hands of the trust and no withholding tax will be applicable when the SPV makes an interest payment to the trust. However, withholding tax at the rate of 5% (non-resident unit holders) and 10% (resident unit holders) shall be applicable in case of payment of interest component of income distributed unit holders. In case of ECBs availed by the business trust, the benefit of reduced rate of 5% tax on interest payments to non-resident lenders shall be available for a prescribed period subject to conditions Dividend received by the trust will be subject to dividend distribution tax at the level of SPV but will be exempt in the hands of the trust, and the dividend component of income distributed by the trust to unit holders will also be exempt in the hands of unit holders. Income by way of capital gains on disposal of assets by the trust shall be taxable in the hands of the trust. Any other income of the trust shall be taxable at the maximum marginal rate. The business trust is required to furnish its return of income. The necessary forms to be filed and other reporting requirements to be met by the trust shall be prescribed to implement the above scheme. Extension of tax holiday Sunset clause for the power sector under section 80-IA extended by from 31 March 2014 to 31 March 2017 Tax Rates remain unchanged: Base rate of corporate tax to remain unchanged at 30% for domestic companies and 40% for foreign companies No change in the rate of surcharge and education cess No change in the rate of DDT, though change proposed in the manner of computation resulting in an increase in DDT Concessional Rate of Withholding Tax on overseas borrowings: The existing withholding tax rate of 5% available in case of interest paid by an Indian company to non-residents on monies borrowed by it in foreign currency from a source outside India (under a loan agreement or through issue of long-term infrastructure bonds) currently available for borrowings before 31 July 2015 is extended to borrowings made before 1 July Other key direct tax proposals: Beneficial Tax Rate of 15% on dividend by specified foreign company to Indian holding company remains unchanged and is extended without any sunset clause. In case of non-deduction or non-payment of taxes withheld at source on payments made to residents, the disallowance of the expenditure to be restricted to 30% of the amount of expenditure claimed. Roll back mechanism proposed to be introduced in Advance Pricing Agreements ( APA ). Indirect tax proposals: Central Excise Duty No change in the general Excise duty rate of 12.36% Excise exemption extended to machine / components required for initial setting up of project for compressed bio gas (Bio - CNG)

8 Exemption to machines / parts related to manufacture of solar voltaic cells and setting up of solar energy production, projects Exemption to parts consumed within the factory of production for the manufacture of goods to be used for generating solar / wind energy Clarification issued to provide that Excise exemption on supplies against International Competitive Bidding also available to sub-contractors Director (Electrical) authorized to issue requisite certificate to enable Delhi Metro Rail Corporation to avail of Nil Excise duty benefits in respect of their Phase-1 and Phase-2 projects. Earlier, the certificate was required to be obtained from Director (Rolling Stock, Electrical & Signalling) Amendment introduced in the Central Excise Valuation Rules to overcome the impact of Supreme Court s FIAT Judgment regarding valuation of manufactured goods sold at a loss. Per the said amendment, even if the goods are sold at a loss, if there is no additional flow back from the buyer, the price charged by the manufacturer would remain to be the transaction value for the purpose of computing Excise duty The resident private limited company now eligible to make an application for Advance Ruling (Effective from 11 July 2014) Clean energy cess on coal increased from INR 50 per tonne to INR 100 per tonne Introduction of a condition for predeposit at 7.5% of the duty demanded or penalty imposed or both for filing first appeal and 10% of the duty demanded or penalty imposed or both for filing second appeal before the Tribunal. The predeposit is subject to upper ceiling limit of Rs.10 crores. (Effective from the date of enactment of the Finance Bill 2014) Several amendments have been proposed in the Cenvat credit Rules. Key amendments include: Prohibition from inter-unit transfer of credit by a Large Tax payer unit (LTU). This is effective in respect of credit availed on or after 11 July Time period of 6 months introduced for availment of Cenvat credit. Earlier there was no prescribed timeline. This amendment is effective from 1 September Amendment in the condition for availment of credit in case of service tax paid under reverse charge mechanism. This amendment is effective from 11 July Effective from the date of enactment of the Finance Bill 2014) Customs Duty Rate Changes Changes in the Basic Customs duty (BCD) rates (effective from 11 July 2014) on some key items are set out below: Items Rate movement Basic Customs duty From To Movement Coking Coal Nil 2.5% Steam and bituminous Coal Anthracite and other coal 2% 2.5% 5% 2.5% Metallurgical coal Nil 2.5% Stainless steel flat products Ships imported for breaking up 5% 7.5% 5% 2.5% Coal Tar Pitch 10% 5% Steel Grade limestone and steel grade dolomite 5% 2.5% Additional duty of Customs in lieu of Excise (CVD) on anthracite coal, coking coal and other coal reduced from 6% to 2%

9 Export duty on bauxite increased from 10% to 20% Reduced BCD of 5% on forged steel rings and NIL Special additional duty of Customs in lieu of VAT/ CST (SAD) on parts and components required for manufacture of wind operated electricity generators 5% BCD on machinery, equipment etc. required for setting up of solar energy production projects and compressed biogas plants (bio-cng) Exemption from BCD for specific goods used in manufacture of solar backsheet and EVA sheet or solar PV cells/ modules Clarification that aircraft engines and parts thereof are eligible for duty exemption when imported for servicing, repair or maintenance of aircrafts used for scheduled operations SAD exempt on import of all machinery and equipment for setting up of solar energy production plant (Effective from 11 July 2014) Other Changes Director (Electrical) authorized to issue requisite certificate to enable Delhi Metro Rail Corporation to avail of Nil BCD and CVD benefits in respect of their Phase-1 and Phase-2 projects. Earlier, the certificate was required to be obtained from Director (Rolling Stock, Electrical & Signalling) State Governments notified as sponsoring authority for Metro Rail Projects covered under the Project Import Regulations, Earlier the sponsoring authority was Urban Development Ministry Scheme of Advance Ruling has been extended to resident Private Limited companies (Effective from 11 July 2014) Discretionary powers of Tribunal and Commissioner (Appeals) for grant of stay of pre-deposit has been replaced with a mandatory deposit of 7.5% or 10% of the duty demanded and/ or penalty imposed, respectively. The pre-deposit is subject to upper ceiling limit of Rs.10 crores. The amendment is prospective and not applicable to appeals and stay applications pending for decision prior to enactment of Finance Act, 2014 The Central Board of Excise and Customs have been vested with powers to condone the delay of review of orders by Committee of Chief Commissioners and Commissioner of Customs by a further period of 30 days (Effective from the date of enactment of the Finance Bill 2014) Service tax No change in the effective Service tax rate of 12.36% Service tax exemption on services provided to government, local authority or governmental authority restricted only to water supply, public health, sanitation conservancy, solid waste management or slum improvement and up-gradation The resident private limited company is being included as a class of persons eligible to make an application for Advance Ruling in service tax (Effective from 11 July 2014) Introduction of a condition for pre-deposit at 7.5% of the duty demanded or penalty imposed or both for filing first appeal and 10% of the duty demanded or penalty imposed or both for filing second appeal before the Tribunal. The pre-deposit is subject to upper ceiling limit of Rs.10 crores. Government to prescribe rules for determination of rate of exchange for calculation of taxable value in respect of certain services to delink the present practice of using conversion rates notified for Customs purpose (Effective from the date of enactment of the Finance Bill 2014) Change in rate of interest on delayed payment of Service tax: Extent of delay Simple interest rate per annum Upto six months 18%

10 More than six months & upto one year More than one year 18% for first six months, and 24% for the period of delay beyond six months 18% for first six months, 24% for second six months, and 30% for the period of delay beyond one year The valuation mechanism for lumpsump price works contract other than original works simplified by providing a flat abatement of 70% as opposed to specified categories getting abatement of 60% and 70% based on the nature of works contract previously (Effective from 1 October 2014) Useful links :EY Tax and Regulatory Services I EY Tax webcast series I Direct Taxes Code I EY Tax Library I Doing Business in India I Working in India

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