Tax Exemption to Boost Infra?

The Infrastructure sector is a key driver for the Indian economy, and for any country as a matter of fact.  This sector is majorly responsible for the county’s overall development. It enjoys intense focus from the Government. For example, the development of the first bullet train in Korea and Japan created a great boost for their economy. Singapore was an empty bare land. After they built their marvelous infrastructure like the Bay Area and Bedok, tourists started flocking in. China could never have achieved this much economic growth or the title of “the world’s factory” if it had lacked infrastructure.

The Indian government has been initiating policies to ensure time-bound creation of world-class infrastructure. These include power, bridges, dams, roads, and urban infrastructure development.

India ranked 44th out of 167 countries in the World Bank’s Logistics Performance Index (LPI) 2018. India ranked 2nd in the 2019 Agility Emerging Markets Logistics Index. Also, India ranked 63rd in the World Bank’s ease of doing business for the year 2019. This was a jump from the 74th position.

The Tax Reform

FM Nirmala Sitharaman had announced in Budget 2020, “In order to incentivize the investment made by the sovereign wealth fund of foreign governments in the priority sectors, I propose to grant 100% tax exemption to their interest, dividend and capital gains incomes in respect of investment made in infrastructure and other notified sectors before March 31, 2024, and with a minimum lock-in period of 3 years.”

CBDT (Central Board of Direct Taxes) announced a major reform on July 6. It notified tax exemption for SWFs’ (sovereign wealth funds) income from investment in the infrastructure sector. This shall take effect from April 1, 2021. Also, it shall be applicable for the AY 2021-22 and the subsequent AYs. The CBDT has widened the scope of ‘infrastructure’. This is for the sole purpose of claiming income tax exemption under Section 10 (23FE) of the I-T Act. (introduced via the Finance Act 2020)

The section provides a  complete tax exemption on interest, dividend, and capital gain incomes of sovereign wealth funds (SWFs) and global pension funds arising from investment in Indian infrastructure. The said Section permits a complete tax exemption to certain exclusive categories of non-resident investors.

Inflow of FDI

The past:

Foreign Direct Investment (FDI) in the Construction Development sector (townships, housing, built-up infrastructure, and construction development projects) stood at USD 25.66 billion during April 2000 to March 2020. (according to the Department for Promotion of Industry and Internal Trade or DPIIT) The logistics sector in India is growing at a CAGR (compound annual growth rate) of 10.5% annually. It expects to reach USD 215 billion in 2020.

The present:

Moreover, India has been witnessing significant interest from international investors in the infrastructure space. Some of the important aspects are:

• Large investment in infrastructure has seen momentum. The overall PE (private equity)/VC (venture capital) investment touched an all-time high of USD 14.5 billion in 2019.
• In 2019, the infrastructure sector witnessed seven merger and acquisition (M&A) deals worth USD 1,461 million.
• In FY20, the cumulative growth of eight core industries stood at 0.6%.
• As of March 31, 26.02 million households get electricity connection under the Saubhagya Scheme.
• The largest deal was done by Abu Dhabi Investment Authority, Public Sector Pension Investment Board, and National Investment and Infrastructure Fund. They made an investment worth USD 1.1 billion in GVK Airport Holdings Ltd.

The future:

India requires investments worth INR 50 trillion (USD 777.73 billion) in infrastructure by 2020/2021. For sustainable development of the country, India plans to spend USD 1.4 trillion during 2019-23. The Government has suggested investment of INR 5,000,000 crore (USD 750 billion) for railways infrastructure between 2018-2030.

To sum it up:

Better infrastructure leads to increasing FDI. Investors never fail to notice the development of roads, availability of power, smooth logistics and better infrastructure of any country. And India understands the need for this.

Reduce dependency on China

Investment in Indian infrastructure has been a sweet spot for China. (according to policy think tank Brookings India) India ranked 31st in the list of countries where China invested. These investments have played a vital role for industries allied with infrastructure. Construction equipment and steel industries depend immensely on such investments. For example, nearly half of the Tunnel Boring Machines that are to be used in building an underground Metro line in Mumbai are owned by Chinese companies. The remaining are owned by western countries but made in China. The reason companies like Tesla, etc invest more in China rather than India is because China is miles ahead of India with respect to their infrastructure sector.

But India’s decision to cut ties with China is going to have a lot of implications. The state of Maharashtra has put on hold three deals worth INR 5,000 crore. Work on the Delhi-Meerut Regional Rapid Transit System has been curtailed.

Is it possible to replace the sources of equipment required for these projects?

Yes, it is.

But not until we find alternative investors or start manufacturing equipment on our own. Firms like BHEL [Bharat Heavy Electricals] or BEML need to speed up their game. And on the other hand, India needs to open routes and provide better trading options to other nations. The tax reform seems to be an attempt to achieve this.