Government lines up funds, tax breaks for core projects

NEW DELHI: The government will aggressively target a GDP growth of 8%-plus, and to achieve this it will earmark massive funds for infrastructure projects with big tax breaks — including under Section 80 IA of the income tax act — to attract private participation.

Consequently, the coming budget will see a big expansion in the coverage of Section 80 IA which gives as much as a 100% income tax deduction on core infrastructure projects.

With the lining up of a mega urban renewal plan, breaks under 80 IA are set to be given to projects for developing, maintaining and creating townships and making existing ones more liveable. The tax break is aimed at making projects more bankable and encouraging private sector participation.

The government has firmed up a Rs 40,000-crore upgradation plan for 25 airports that are entitled to tax breaks under 80 IA. Ports, inland water way and inland port projects are covered as well. So are developers of SEZs and industrial parks.

Under this provision, an enterprise that operates and maintains basic infrastructure facility — including toll roads, bridges, rail system, highway projects, water supply, water treatment system, irrigation project, sanitation, sewerage and waste management system — is entitled to a 100% tax holiday for 10 out of 20 years. The tax break has no sun set clause, implying that it is open-ended.

The coverage under Section 80 IA may be expanded now to include townships. The government is also looking at extending sunset clauses — which refers to a pre-determined date of expiry — in sectors like power and telecom.

In the power sector, enterprises engaged in power generation, transmission and distribution are entitled to a 100% tax holiday in 10 out of 15 years. The concession is available upto 2006 and the demand is to extend the benefit upto 2012.

Telecom companies also enjoy tax breaks under 80 IA. A two-tier tax benefit is extended to profits accruing to basic and cellular operators, Internet service providers and broadband networks set up on or after April 1, 1995 and before April 1, 2005. The benefit to these enterprises includes a five-year tax holiday, with a further deduction of 30% of profits the next five years.

The government’s move to expand coverage under 80 IA is, however, not in sync with the recommendations of expert committees. The Shome Committee, for instance, was of the view that the 80 IA benefit adversely impacted revenue flows due its wide coverage.

Similarly, the Kelkar task force on implementation of the fiscal responsibility and budget management act suggested phasing out incentives under 80IA and 80 IB in two years. The rationale was that these incentives only add to transaction costs and camouflage the inadequate performance of corporate managers.

In fact, most of these infrastructure projects could be jointly sponsored by the Finance Ministry and the Planning Commission, through Special Purpose Vehicles into which fresh liquidity will be injected by the RBI. The central bank is likely to inject fresh rupee resource into the SPV, and not forex reserves, as was proposed earlier. The idea of paring forex reserves had become a bit controversial.