TAXATION ON INFRASTRUCTURE PROJECT: AN ISSUE OF LAW
Author: Munira Muzaffar Bharmal, pursuing B.B.A.,LL.B. from United World School of Law
In India, the infrastructure sector is exploding. However, with a slew of new tax laws and a government eager to extort more money from investors, the situation is becoming increasingly complicated. This article provides insight into the major obstacles to completing an infrastructure project in India.
Infrastructure is the foundation of any developing economy, including India's. A well-constructed infrastructure provides the necessary propulsion and lays the groundwork for every economy to achieve new heights. Foreign investors have shown a strong interest in India's infrastructure industry, growing steadily over the years. In April 2021, India's infrastructure industry accounted for 62.6% per cent of the country's industrial production, felling at almost 5%.
Taxation on Infrastructure Sector
The government devotes a substantial percentage of its budget to road development. It has focused heavily on highway-building projects in recent years in collaboration with the National Highways Authority of India (NHAI). The GST (Goods and Services Tax) has substantially impacted this rapidly growing business.
Taxability of Road Construction Projects
Under GST, the provision of goods or services is a taxable event. Notification No. 20/2017- Integrated Tax (Rate) dated August 22, 2017 specifies the tax rate to be applied to a composite supply of goods and services in the form of a works contract, as defined in clause (119) of section 2 of the CGST Act, 2017. The tax rate on construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, or alteration of a road, bridge, tunnel, or terminal for road transportation for the general public, as specified in clause (119) of section 2 of the Central Goods and Services Tax Act, 2017, is 12%.Exemptions
Exemptions are inevitable because the government has put a lot of emphasis on infrastructure programmes. In this part, we'll look at some of the exemptions available to road construction projects, including:
Toll payment service for a road or bridge access - Exemption Notification No. 12/2017-Central Tax, S. No. 23 (Rate). As a result, toll payments are exempt from GST.
Exemption Notification No. 12/2017-Central Tax (Rate), S. No. 23A, as amended by Notification No. 32/2017-Central Tax (Rate) dated October 13, 2017. On payment of an annuity, service by access to a road or a bridge. As a result, annuity payments for highway development received from NHAI are tax-free.
Services provided by the Central Government, State Governments, Union Territories, or local authorities in exchange for allowing non-performance of a contract for which the Central Government, State Governments, Union Territories, or local authorities are owed compensation in the form of penalties or liquidated damages by the Central Government, State Governments, Union Territories, or local authorities are owed compensation in the form of penalties or liquidated damages by the Central Payments collected as fines, penalties, or other penalties for the Central Government, State Governments, Union Territories, or local governments tolerating non-performance of the contract are excluded from the exemption.
Many questions about the GST remain unaddressed by the government. One of these difficulties is the taxability of annuities from the government/NHAI in constructing road projects by concessionaires.
The National Highways Authority of India (NHAI) pays annuities to concessionaires for road building. In most cases, NHAI pays annuity payments to concessionaires who do not have the right to collect toll charges.
Under Sl. No. 23 of Notification No. 12/2017-CTR dated 28.06.2017, service by way of access to a road or a bridge on payment of toll fees is exempted.
However, no exemption has been allowed concerning annuity payments made by NHAI to the concessionaire for construction.
Due to this unconventional tax treatment and the government's continued stance, it appears that the annuity paid by concessionaries from the government for road construction under Models II and III is now subject to GST, and the exemption under Sl. No. 23A is no longer valid.
In Nagaus Mukundgarh Highways Pvt. Ltd., Udaipur [NHMPL] v. Hon'ble Rajasthan Appellate Authority for Advance Ruling ('AAAR'). The AAAR has reviewed the application of SI. No. 23 A concerning annuity payments received by the applicant from NHAI. The AAAR has studied the history under the service tax system and the agenda and minutes of the 22nd GST Council Meeting to better comprehend the scope of such entry. The critical points from the judgement are outlined below.
According to the GST Council's 22nd meeting minutes, AAAR observed that the agenda was discussed regarding the exemption to an annuity paid to Concessionaries by NHAI instead of Toll Charges to Developers of Public Infrastructure. It was opined that Council considers granting an exemption to NHAI Annuity paid to concessionaries during road construction because toll charges are free from Service tax and GST, and the annuity is paid in place of toll charges.
Thus, it is apparent from the preceding minutes that the purpose of SI.No.23A is to propose an exemption from toll rates for annuities provided by NHAI to concessionaires. The text of SI. NO. 23A, on the other hand, does not corroborate this intent, which would result in a tax liability on annuities received by the concessionaire.
The concessionaries are offered a light of hope due to the judgement above regarding applying the exemption to annuity payments. Following are some of the unanswered questions in light of these developments:
Whether an annuity payment is equated to toll charges because the concessionaire is responsible for the O&M of roads in both circumstances, i.e., NHAI annuity payments or toll charge collection?
Whether NHAI annuity payments to concessionaires during road projects' operation and maintenance phases be considered for services classifiable under SAC 9967?
According to the Ministry of Maritime transportations, shipping accounts for nearly 95% of India's trade volume and 70% of the value of trade. Prime Minister Narendra Modi renamed the Ministry of Maritime transportation to the Ministry of Ports, Navigation and Waterways in November 2020.
India introducedthe hole of 12 fundamental ports and 205 small and intermediate ports. As a part of the country`s country wideimaginative and prescient plan, six new fundamental ports may bemounted in Sagarmala. The boom of India's ports and maritime quarter is critical to the country's change and commerce.
India is the 16th largest maritime nation in the world with a coastline of about 7,517 km. The Indian government strongly supports port development. This allows the use of 100% foreign direct investment (FDI) arrangements for port and port industry and defense projects. It also makes it much easier for the teams that design, operate and maintain ports, inland waterways and inland ports to benefit from a 10-12 month tax cut.
Under Section 80 IA of this Act, profits earned by industrial enterprises or companies that develop, operate and maintain infrastructure are 100% deductible for a 10-year consecutive evaluation period. The port trusts have requested that the government change Section 80 IA, claiming it has a "restrictive meaning" for infrastructure, particularly at ports. They have recommended that the phrases' navigational channels' and 'national seaways' be added to the Act to refer to existing infrastructural facilities that are now tax-free. The Act now covers ports, airports, inland ports, and inland waterways.
While a developer/operator of a port is entitled to a tax holiday, the question is whether associated infrastructure facilities like Container Freight Station (CFS) qualify as infrastructure (port) facilities and therefore be eligible for a tax holiday. It should be noted that the Indian customs authority may consider a CFS to be part of a port.
While tax tribunals have previously ruled that CFS is not eligible for a tax holiday because it is not specifically mentioned in the term infrastructure facility, the debate appears to have resurfaced with a high court ruling that facilities are part of an infrastructure facility are eligible for a tax holiday. However, the Budget 2012 proposes to provide investment-related incentives for CFS and ICD.
The Airport Authority of India (AAI) signs a contract with an airport operator organization for the airport's development, operation, maintenance, design, construction, upgrade, modernization, financing, and management. In turn, the latter subcontracts its services to third parties. Those engaging in infrastructure projects would be eligible for financial incentives, as determined by the government from time to time. The following incentives are now available:
• For the first five years, deduction of 100% of gains from taxable income.
• A thirty per cent profit deduction for the next five years for the same purpose;
• A full deduction for 10 out of twenty fiscal years of the assesses choice.
• Financial institutions that provide long-term financing for infrastructure projects can deduct 40% of their profits from infrastructure.
When numerous airports in India are being modernized, it is debatable whether the activity comprises new infrastructure and whether a deduction would be granted. The answer is most likely determined by whether modernization results in expansion, new/additional facilities or just a makeover of current ones. While a tax holiday should be granted in the first situation, the second case looks more problematic.