India: Budget 2016: Key Updates - Infrastructure Sector

Last Updated: 10 March 2016
Article by Trilegal .

The Budget 2016 lays emphasis on giving a boost to the infrastructure sector in a number of ways. It focuses on improving rail infrastructure, accelerating the process of construction of roads and development of ports and national waterways. Also, in order to revitalise PPP projects, specific initiatives have been announced.

The Union Budget 2016, has proposed a high budgetary allocation for the infrastructure sector to give a boost to infrastructure and investment with a major focus on roads, alongside railways and ports. Financing issues in this sector have also been addressed.

Key initiatives are proposed to re-vitalize infrastructure Public-Private Partnership (PPP) projects, such as enactment of the Public Utility (Resolution of Disputes) Bill and issuance of guidelines on renegotiation of PPP Concession Agreements. A new credit rating system for infrastructure projects is also proposed.

Further, the road transport sector in the passenger segment is proposed to be opened up for private participation. The government has also proposed plans for revival of unserved and underserved airports in partnership with states.

Key policy announcements

(a) The budget proposes to allocate INR 2.18 trillion for road and rail sector for the next fiscal.

(b) INR 550 billion is proposed to be allocated towards roads and highways, with an additional INR 150 billion being raised by National Highways Authority of India through bonds.

(c) Nearly 10,000 kilometers of National Highways are proposed to be approved in the fiscal year 2016-17. Additionally, 50,000 kilometers of State Highways, will be taken up for upgradation as National Highways.

(d) Road transport sector in the passenger segment is proposed to be opened up to the private sector by amending the Motor Vehicles Act to allow more private participation.

Key tax announcements

Direct tax

(a) No changes are proposed in the corporate tax rates, which are currently at 30% (plus surcharge and cess), except for some small companies, new manufacturing entities and startups (not availing tax incentives and accelerated depreciation).

(b) Phasing out of 100% profit linked incentives for infrastructure facilities is being proposed.

(c) The commitment to implement General Anti Avoidance Arrangement (GAAR) from 1 April 2017 is reiterated in the budget.

(d) The Income Tax Act is proposed to be amended to provide that with effect from 1 April 2001, no Minimum Alternate Tax (MAT) would be applicable on a foreign company, if such foreign company does not have a permanent establishment under the relevant tax treaty or a place of business in India.

(e) The Budget provides that profit linked deduction on eligible business of infrastructure facility (road, rail system, highway project, port, airport, etc.) and development of a special economic zone will be available only if such activity is commenced on or before 31 March 2017.

(f) With a view to completely phase out exemptions and tax incentives, the budget proposes to restrict accelerated depreciation to 40%, from the current 80%, with effect from 1 April 2017.

(g) No dividend distribution tax will be payable on any distribution made out of income of a Special Purpose Vehicle to the REITs and INVITs having specified shareholding.

(h) An additional tax at 10% of gross amount of dividend is proposed to be paid by non-corporate recipients, receiving dividend in excess of INR 1 million per annum.

(i) A graded reduction in the weighted deduction for expenditures incurred on scientific research is proposed.

(j) The budget proposes to clarify that capital gains arising from transfer of a long term asset being share of a private limited company will be chargeable to tax at the rate of 10%.

(k) Subject to fulfilment of prescribed conditions, a 100% deduction is proposed for profits to an undertaking engaged in developing and building affordable housing projects (for flats up to 30 sq. metres in four metro cities and 60 sq. metres in other cities), approved during June 2016 to March 2019. However, MAT will apply in such cases.

(l) For first time home buyers, the budget proposes a deduction of INR 50,000 per annum for additional interest paid on loans up to INR 3.5 million, sanctioned in 2016-17, where the house cost does not exceed INR 5 million.

Indirect taxes

(a) The effective service tax rate will be increased to 15%. Krishi Kalyan Cess at the rate of 0.5% will be levied on the value of all taxable services.

(b) The following key exemptions are proposed to be introduced / restored in the budget:

(i) service tax exemption on construction services are proposed on affordable houses (up to a carpet area of 60 sq. metres), under any housing scheme of the state government;

(ii) the exemption on services of construction, erection, maintenance etc. of canal, dam or irrigation works provided to government entities (which was initially introduced in January 2014) is now retrospectively granted from 1 July 2012;

(iii) service tax exemption for the following services is proposed to be restored with effect from 1 April 2015 till 30 March 2020, in respect of contracts entered into before 31 March 2015 (where applicable stamp duty has been paid):

  • specific construction, erection etc. services provided to the government or local authority or governmental authority;
  • specific construction, erection etc. of original works pertaining to airports and ports.

(c) The budget proposes to withdraw service tax exemption on services of construction, erection, commissioning or installation of original works pertaining to monorail or metro in respect of contracts entered into on or after 1 March 2016.

(d) Excise duty exemption, presently available to concrete mix manufactured at site for use in construction work at such site, is proposed to be extended to ready mix concrete manufactured at the site of construction for use in construction work at such site.

(e) Excise duty is proposed to be reduced to 6% on parts of railway or tramway locomotives or rolling stock (chapter heading 8607) and railway or tramway track fixtures and fittings etc. (chapter heading 8608).

(f) Exemption of countervailing duty is proposed to be withdrawn on specified machinery required for construction of roads.

(g) Abatement rates in respect of services by way of construction of residential complex, building, civil structure, or a part thereof, are proposed to be rationalized at 70% by merging the two existing abatement rates (70% for high-end residential units and 75% for low-end residential units depending on area and value of such unit).

(h) Certain changes in the reverse charge mechanism are proposed in the budget. Accordingly, the service tax liability is proposed to devolve on the recipient business entity:

(i) with respect to any service provided to it by government or local authorities;

(ii) on receiving services of transportation of goods by vessels into India, from a service provider located outside India.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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