India: Govt Has Kept The Promise On Roads And Highways But Sector Needs More Funds

Last Updated: 19 April 2017
Article by HSA Advocates

A priority target of the Union Budget of 2016-17 was to accelerate the growth of the highways segment, considering that the road sector has been ailing for the last lustrum and beyond.

To achieve this target, the infrastructure sector was allotted INR 2,21,246 crores of which a sum of Rs. 97,000 crores were allocated for investment in the year 2016-17 towards development of roads. The allocation included Rs. 27,000 crores towards Pradhan Mantri Gram Sadak Yojana ("PMGSY"), Rs. 55,000 crores to Minstry of Road Transport and Highways (MoRT&H) and an additional INR 15,000 crores to be raised by the NHAI through bonds.

The FM also announced that amendments will be made to the Motor Vehicles Act. The Budget also announced the issuance of guidelines for renegotiation of PPP concession agreements and development of a new credit rating system for infrastructure projects.

Further, the sunset clause for phasing out tax holiday granted to undertaking engaged in developing and maintaining infrastructure facilities which includes roads and highways was extended from April 1, 2016 to April 1, 2017 with the view incentivise the roads construction sector. Accordingly, suitable amendments to Section 80-IA of the Income Tax Act, 1961 ("IT Act") was proposed in the Budget. Additionally, deduction of 100 per cent expenditure of capital nature incurred for developing or maintaining or operating roads and highways was provided by amending Section 35AD of the IT Act.

On the indirect tax, however, surprisingly, a regressive step was taken by withdrawing exemption of countervailing duty being provided on import of specified machinery required for construction of roads thereby. The CVD was prescribed at 12.5 per cent.

Post Budget 2016-17 - Implementation

True to its promise, the Government awarded a total length of 5688 km of highways up till November 2016, out of which a total length of 4021 km has been constructed.

The Motor Vehicles (Amendment) Bill, 2016, was introduced and required the Center to develop a National Transportation Policy in pursuance thereof. The Bill aimed at safeguarding the interest of the public and ensuring equity, while seeking to enhance private participation in the highway sector. A National Road Safety Council was constituted as the apex body to take policy decisions in the matter of road safety under the National Road Safety Policy. Further, an amount of Rs 600 crores which were earmarked for road safety purpose for the FY 2016-17 has been spent on rectification of black on the national highways.

The Department of Economic Affairs (DEA) has developed a report on the framework for renegotiation of PPP contracts, with a particular focus on the National Highway and Major Ports Concessions. Based on this report, the DEA is currently working on identifying the requisite modifications/amendments to the existing MCAs; as well as the regulatory and policy regimes necessary to implement such recommendations. CRISIL, primarily in consultation with the Ministry of Finance, has developed a new credit rating framework for infrastructure projects that would facilitate greater participation by long-term investors and lenders. The new credit rating system was released on January 12, 2017, and is based on the 'expected loss' (EL) methodology.

Budget 2017-18 Expectations

A very good progress has been made as regards the various promises made out in the Budget. Having said this, the road and highway sector requires assured funding to properly plan, prepare and award projects, involving a gestation period of 3 to 5 years. The ministry of road MoRT&H has requested the Finance Ministry to allocate Rs 90,904 crore to help in timely completion of the ongoing highway projects and to compensate for the toll revenue losses following demonetisation. However, according to media reports, said indicated/estimated outlay in the budget for 2017-18 is only Rs 58,362 crore. The proposed reduction in allocation of national highway sector would cause a major setback in the progress of ongoing projects and in the achievement of targets.

Thus Budget 2017-18 should address the issue of funding road projects and would be required to allocate requisite funds for completion of ongoing projects. The Government could explore looping in the State Governments and private sector for funding the projects.

Budget should also propose setting up of logistics parks along national highway corridors linking ports and manufacturing hubs, setting up of bus ports with better facilities requires be given priority. The sector is also looking at setting up of 'Automobile clusters' across the country including Chennai.

On the fiscal front, tax holiday under Section 80IA should be extended beyond April 1, 2107. The exemption from MAT is another issue which the infrastructure sector has been raising year on year should be considered since MAT results in outflow of cash which would hit the sector badly which is already facing cash crunch on account of demonetisation.

Other amendments to Section 80IA and Section 35AD of the IT Act would be required to clarify that modernisation and expansion of existing roads and highways would also qualify as new infrastructure facility. Currently, there is an ambiguity as to whether modernization or expansion of existing roads and highways would qualify as new infrastructure facility qualifying for tax holding under Section 80IA and capital deduction under Section 35AD of the IT Act.

It is also suggested that the exemption to CVD on machinery required for construction of road should be restored in order to incentivise the road projects.

(The writers are associate partner, and partner - HSA Advocates)

For full coverage of Union Budget 2017 click here.

Originally published in First Post

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