Service tax exemption on tolls tops highway developers' demands

Our Bureau New Delhi | Updated on February 18, 2011 Published on February 17, 2011

Taxed by toll

Changes in rules with regards to dividend distribution tax (DDT) for road projects, clarifications to exempt toll revenues from service tax and extending 10-year tax holiday to widening of roads are some of the demands of the highway developers ahead of the Budget 2011-12.

Tolls are collected from the users of the highways, and the rules for toll collection prevent the highway developers from charging anything beyond the specified toll rates, the National Highways Builders Federation (NHBF) points out. Thus, they should not be asked to collect service tax from users and pass it on to the Government, said the NHBF Director General, Mr M. Murali.

“(The Department of) Revenue contends that such toll fee is chargeable to service tax. There are litigations on this aspect across the country,” NHBF said in Budget memorandum.

The developers have also asked the Government to amend rules with regards to dividend distribution tax (DDT) to prevent cascading effect. “Infrastructure development business often requires a multi-tier corporate structure with a holding company at the top which is generally a listed entity. The holding company makes investments in various step-down subsidiaries which are involved in the actual execution of the infrastructure project,” stated the builders federation.

“The step-down subsidiaries are created so as to comply with either the guidelines set out by agencies like NHAI or the mandates given by the lenders.

“These step-down subsidiaries pay DDT on distribution of dividends to its holding company, which in turn is required to pay DDT while distributing dividends to its shareholders. This reduces the return of the equity investors in the holding company, making investment in infrastructure sector less attractive.”

The developers have also demanded that the Government extend a 10-year tax holiday under Section 80 IA to widening of roads.

At present, 10-year tax holiday is available to enterprise developing ‘new' infrastructure facility, but the term ‘new' is not defined. “Road widening projects are in essence a ‘new' facility as they involve construction of additional lanes, and resurfacing of existing lanes.”

The federation has asked the Finance Ministry to allow usage of duty-free imported capital goods for road construction business rather than to road project. “There is ambiguity on usage of duty-free imports for other road construction projects after the completion of the specific road construction project,” it stated.

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Published on February 17, 2011
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