As lack of adequate infrastructure is a major constraint on India's growth, the Approach Paper to the Twelfth Plan (2012-17) rightly stresses the need for more infrastructural investment with the aim of fostering a faster, sustainable and more inclusive growth. The approach paper has projected that during the Twelfth Plan, investment in the infrastructure sector is estimated to go up to Rs 45,00,000 crore. It is projected that at least 50 per cent of this will come from the private sector. For financing the balance gap and attracting private players, the Government would need to come up with innovative ideas and new models of financing.

The Budget 2012 is step towards boosting the investment in the infrastructure sector, especially the power industry.

Funding proposals

The Budget proposes to add new sectors such as oil and gas/LNG storage facilities and pipelines, irrigation, and so on, as eligible sectors for Viability Gap Funding under the scheme ‘‘Support to PPP in infrastructure'' which is an important instrument for attracting private investment.

Further, to ease access of credit to infrastructure projects and boost infrastructure developers, India Infrastructure Finance Company Limited has put in place a structure for credit enhancement and take-out finance. A consortium for direct lending and grant of in-principle approval to developers before the start of the project has also been created.

The Government had announced tax-free bonds for financing infrastructure projects of Rs 30,000 crore in 2011-12. To enhance the investments, the Government has proposed to double the amount of tax-free bonds to Rs 60,000 crore, which includes Rs 10,000 crore for the power sector.

To provide the existing power players with low-cost funds, the Government has proposed to allow external commercial borrowings (ECBs) for part-financing of rupee debts in existing power projects. In 2010, the RBI had liberalised the ECB norms to allow refinancing of rupee debt in power sector, however, only for new projects. Thus, the Budget proposes to provide an additional relief to the power players vis-à-vis their existing projects.

Tax proposals

Under the current tax laws, 100 per cent profit-based deduction is available to power sector undertakings, which start generating, distributing or transmitting power before March 31, 2012 for a period of 10 years out of 15 years.

The Budget has proposed to extend the profit-based deduction to another one year, thereby, easing the financial position of the power players.

It is relevant to note that the Direct Taxes Code Bill, 2010 (DTC), is likely to be introduced from April 2013 and has proposed to substitute the profit-based deduction available to power sector with the investment-based deductions.

This radical change would lead to lesser tax incentives to the power sector players. However, the DTC provides for grandfathering of tax holiday to power undertakings which are eligible to claim deduction under the current tax laws for the unexpired period.

The Budget proposes to extend the benefit of additional depreciation of 20 per cent in the initial year to new asset acquired by power generation companies which is currently available to manufacturing sector.

Further, to lower the cost of debt, the tax withholding rates on interest on ECB raised by power companies have been reduced from 20 per cent to 5 per cent.

The power sector is undergoing a severe coal supply crisis. To address this issue, the Government has also proposed a full exemption from basic Customs duty for steam coal, natural gas, and so on, and a concessional CVD of 1 per cent to steam coal for a period of two years till March 31, 2014.

The incentives given to the power sector, which is one of the leading revenue generating sectors of the world, is one of key highlights of the Budget. With the above proposed changes, the Finance Minister has intended to amplify private investments so that the pressure on public sector funding is reduced.

(The author is Partner, Tax, KPMG in India.)

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