Reduce MAT rates for infrastructure projects

The Government has a major challenge this year to come up with a Budget which is reform-oriented, growth-inducing and also one that keeps in check the growing fiscal deficit.

Unlike the previous years, the economy is going through turbulent times on account of the Euro Zone crisis, 2G scam, high interest rate, rising oil prices, and so on.

Infrastructure, which was the golden sector a few years ago, is battling regulatory bottlenecks, land acquisition delays and credit crunch.

The present high interest rate environment has eroded profitability. We, therefore, expect the Budget to come up with tax incentives, fiscal stimulus, sectoral incentives and regulatory reforms to boost the sector.

Tax Incentives

In the current scenario, the projects that become operational after FY12 are not eligible for 80IA tax benefits. With the implementation of Direct Tax Code (DTC) getting delayed, it is important to extend the 80IA tax benefits till its implementation. This is essential, otherwise the new projects commissioning after FY12 will be at a significant disadvantage. The MAT rates have been increased consistently in the previous budgets. A high MAT rate has significant impact on the project IRRs. As a result, projects do not fully enjoy the tax incentives provided by the Government.

Therefore, MAT rates should be reduced or exempted for infrastructure projects. Also, Dividend Distribution Tax (DDT) for infrastructure project SPVs, which derive value from project cash flow and not capital appreciation, should be removed.

Fiscal Stimulus

The infrastructure sector is heavily dependent on State Government projects.

Several of these State agencies are struggling because of lack of funds and projects have been stalled. This has resulted in large amounts of receivables and working capital getting locked.

Interest rates are high and extending working capital limits has become a challenge. This has impacted the margins and also the cash cycle for infrastructure firms.

The Government should address the issue of ailing state agencies and provide the necessary fiscal stimulus to get the projects back on track.

Sectoral Incentives

Infrastructure remains a vital sector for India's growth story. Lending participation to infrastructure sector needs to be boosted, to provide the much needed credit.

Additionally, the Government should prioritise the establishment of specialised infrastructure debt funds, which are also initiated by various institutions.

In order to augment Indian retail market participation in the infrastructure bond issues, tax exemption limit may be increased from the current Rs 20,000 to at least Rs 50,000 in a financial year. Most importantly, ECB should be allowed across the board, not just for funding capital expenditure.

Public-private partnership was essentially introduced to distribute the project risk between the Government and the private players. In reality, the entire risks are borne by private players.

For example, several NHAI projects have been stalled on account to delay in land acquisition by NHAI.

The land acquisition risk should have been borne by NHAI and it should compensate the private players on the resulting cost overruns and loss of revenue.

The Government should address these issues and process the claims faster and provide a quick solution.

Also, there are several restrictions on the sale of BOT projects.

The restrictions on monetising assets should be removed for providing the necessary capital in these tough market conditions.

Infrastructure is a key driver for economic growth in India. For the past couple of years, the sector has been struggling on account of high cost of debt, regulatory impediments and sectoral issues.

This Budget provides the Government the ideal opportunity to rescue the flagging growth. Failure to act can result in the Indian growth story being derailed.

(The author is CMD, IVRCL.)

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