Financial Daily from THE HINDU group of publications
Tuesday, Jun 22, 2004

Cross Currency

Group Sites

Industry & Economy - Income Tax

Centre reviewing select exemptions in I-T Act

C. Shivkumar

Bangalore , June 21

IN a bid to bolster revenue receipts, the Centre has begun a review of some major tax exemptions in the Income-Tax Act.

Sources here said that some of these tax exemptions are likely to be rationalised or, in fact, pruned in the Budget to be announced on July 8.

The pruning or rationalisation of the exemptions is also intended to partly offset the reduced flow of non-tax resources.

The exemptions facing a review include Section 10 (23G) of the I-T Act, where dividends and interest spreads earned out of funding-designated infrastructure projects are free from tax liability. Changes in this section would have a direct impact on the tax liabilities of financial institutions, including infrastructure-specific lending institutions.

According to the sources, such a regime of exemptions is no longer valid, especially since interest costs for infrastructure projects had considerably softened.

The exemptions were introduced during an era of high interest rates. For instance, in 1998 when Section 10 (23G) was offered, the interest costs for project debt finance were upwards of 14 per cent.

In fact, most power projects that raised bonds during this period had done so at rates in excess of 16 per cent.

Accordingly, the introduction of this section was to ensure that borrowing costs for projects were kept low. Such a concession would also provide better incentives to lenders/investors in infrastructure projects.

At present, however, the project-financing environment has undergone a sea change, the sources said.

Interest rates have dipped to rock-bottom levels. In fact, most infrastructure projects are in a position to raise funds at less than 9 per cent per year.

For instance, the 500-MW Bellary Thermal Power station project, promoted by the Karnataka Power Corporation Ltd, has been able to obtain 14-year fixed rate debt funds at 7.5 per cent, among the lowest.

Besides, cross-border resources have also been available at even lower rates, at spreads of under 100 basis points over the London Interbank-offered rate. This would imply a funding cost of about 4 per cent after including the one-year forward premium of 0.5 per cent currently prevailing in the markets.

Another tax exemption brought under the Finance Minister's scanner includes Section 54 EC of the I-T Act. Under this section, long-term capital gains have been exempt from tax if invested in certain categories of bonds.

According to the sources, this section is expected to be pruned further to restrict the quantum of exemption. Any such pruning, however, is likely to be done on the same lines as the rationalisation of Section 80 HHC, where the phase-out was staggered.

But, the sources said, some exemptions such as Section 36 vii of the I-T Act are expected to be untouched. This section pertains to provisions for non-performing assets.

It had increased the exemptions to 10 per cent. This despite the fact that last year the Government had granted all the banks participating in the securities buyback programme full exemption from profits earned.

The sources said there is no need for tampering with this exemption since it was close-ended.

The 10-per cent exemption on provisions is valid only up to the year ending 2005.

More Stories on : Income Tax

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Nurses recruitment — Banner of US ties up with Healthcare Placements

`High coconut oil prices rule out biodiesel variant'
Huge export demand for biodiesel
Democrats up the ante against outsourcing
Assocham for cut in interest payment liability
India Inc sees reform-oriented Budget
Indian Chamber seeks cut in service tax rate
New CII President outlines 8-point agenda for growth
Call for increased focus on agricultural sector
AP Govt urged to go for `quality borrowing'
Poor should have a voice in policy making: World Bank
Socio-economic survey
Greenpeace launches Right to Know kit
PMO mulls raising fertiliser subsidy
Govt to unveil national foreign trade policy in July — Focus likely on non-IT services sector
Increasing risk from habits, lifestyle — India put on `lead time' to cancer epidemic: Expert
N-power sector may be opened up — Changes to Atomic Energy Act await Cabinet nod
Private capital sought to tap radio isotopes
Kerala demands say in service tax collection
Textile unions to protest against wage accord issue
Tripura Govt grants varsity status to ICFAI
`Intelligent' homes to come up in Pune
Role for CLRI in raising leather sector standards
After nine years, only 15 units ready to do business — Relocation pangs of Kolkata Leather Complex
Upasi sets up task force to promote rubber wood
DRDO launches `Project CHITRA' to develop fast computing machines
C-DIT plans digital archive on Kerala
Social security cards for EPF members
How feasible is a rural employment guarantee?
In Hyderabad today
Centre reviewing select exemptions in I-T Act
Grain exports may fall below 10 lakh t
Exports log 29.4% growth in May
Soyameal exports may top 40 lakh t next year
Workshop stresses on need for earthquake preparedness
`Project'ing corruption in multilateral banks

The Hindu Group: Home | About Us | Copyright | Archives | Contacts | Subscription
Group Sites: The Hindu | Business Line | Sportstar | Frontline | The Hindu eBooks | The Hindu Images | Home |

Copyright 2004, The Hindu Business Line. Republication or redissemination of the contents of this screen are expressly prohibited without the written consent of The Hindu Business Line