The Hindu Business Line : Centre reviewing select exemptions in I-T Act

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According to the sources, such a regime of exemptions is no longer valid, especially since interest costs for infrastructure projects had considerably softened.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