Government could relax tax rules for road developers

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The government plans to relax tax provisions for the roads and highways sector by allowing developers to pay taxes over the concession period of a project rather than making an upfront payment.

In the case of road projects developed under the HAM or the hybrid annuity model, investors may have the option of paying income taxes over the 25-30 year concession period rather than paying income taxes. advance after the completion of construction, said two people familiar with the development. on condition of anonymity.

The changes, they said, can be announced as part of the budget proposals for 2022-2023 to be presented by Finance Minister Nirmala Sitharaman on February 1. A spokesperson for the finance ministry did not respond to an email seeking comment.

Those named above said clarity on road sector taxation would provide more liquidity to developers and improve their margins in the hope that excess funds would be reinvested in investments in other infrastructure projects.

Currently, in HAM projects, the concessionaire is compensated by fixed annuity payments during the construction phase and O&M (operation and maintenance). Forty percent of the construction rent is paid during construction and 60% over the remaining term of the concession.

The Goods and Services Tax Council recently clarified that construction annuities are subject to GST, while operation and maintenance annuities are exempt. But there is ambiguity over the tax treatment of the HAM since the income does not come from the toll but in the form of fixed annuities from the National Highway Authority of India (NHAI) for construction and operation and maintenance components.

It is expected that the construction rent can be taxed upon completion of construction using the Percentage Completion Method (POCM), although 60% is collected over the concession period.

The fiscal clarity by the Ministry of Finance will also allow developers of HAM projects to amortize their cost for the development of such a facility, as business expenses, over the concession period (excluding construction period). This will allow developers to avoid up-front tax payments that could be partially paid as the annuity is received from NHAI under the terms of the concession agreement.

With the NHAI now preferring HAM to other models for bidding on road projects, tax clarity should rekindle investor interest in infrastructure projects as they could see higher returns and margins.

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