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The construction industry, being the builder of the physical infrastructure of a country as well as one of the largest employers of semi-skilled manpower, plays a crucial role in the economic progress of the country.
Indian construction players have moved up the value chain both in terms of scale as well as area of work/verticals such as roads, irrigation/dams, power plants, tunnels, urban infrastructure, etc, and currently sit on healthy order books.
The strong investment splurge in infrastructure under NHDP, JNNURM, various irrigation projects undertaken by the state government and a jump in planned power generation capacity addition in 11th Plan, etc, all have facilitated in this regard, offering enough opportunity for industry players across the spectrum. It even allows companies the affordability of cherry picking.
Of late, there is an inordinate delay in orders from NHAI relating to the concession document and mode for PPP projects. The pace of development/completion of infrastructure projects were also often caught in bottlenecks such as right of way, land acquisition, etc, apart from funding of the PPP project in a high cost scenario.
Moreover, the 11th five year plan (2007-12) envisaged that infrastructure investment will reach 9 per cent of the GDP by 2012. However, in the interim budget 2009-10, this was postponed to 2014.
Industry expectations
Introduce common goods and service tax at the earliest. It will help the construction industry rationalise its tax structure and simplify the procedures for tax compliance.
Rationalise dividend distribution tax so as to remove the current cascading effect.
Provisions of tax deduction at source under Section 194C for the infrastructure/construction industry with paid up capital above Rs 5 crore (Rs 50 million) may be removed.
Infrastructure SPVs (which are created as per the respective concession agreements) should be allowed to qualify for reduced tax rates applicable to capital gains for listed companies. The SPVs should be treated as 'deemed listed companies' and the developer/investor should be entitled to reduced capital gains tax/exempted from capital gains tax, if they stay invested for the required number of years as per the provisions of Income Tax Act.
Treat infrastructure holding companies as a separate class of NBFC and exempt them from the restrictions imposed on usual NBFCs.
Additional depreciation on plant and machinery purchased after April 1, 2002, should be given to the construction sector based on addition to the net block as a unit of measurement for allowing similar relief, as it is difficult to quantify capacity addition. The benefit may be granted if the addition during the year to the net block of assets, plant and machinery exceeds by 25 per cent of the value of the net block of plant and machinery of the preceding year.
Restore depreciation rate for all plant and machineries back to 25 per cent as was prevalent in earlier years up from the current 15 per cent.
Interest payments to foreign lenders without liability of withholding tax under Section 10(15) (IV) (f) of IT Act.
To facilitate private investment in securities in the nature of bonds/debentures issued by Indian companies engaged in the infrastructure and construction industry undertaking infrastructure projects should be added as qualifying long term specified assets under Section 54EC.
Further, it is suggested that considering the importance of infrastructure to the nation, proviso to Sub Section (1) of Section 54EC, which puts a cap of Rs 50 lakh (Rs 5 million) may be deleted.
The construction equipment for projects should therefore be considered for custom duty exemption.
Customs duty should not be levied at the time of import of the equipment on lease/hire, in view of the fact that the transaction is subject to service tax and income tax. Importers of construction equipment on lease/hire are required to pay customs duty at full rate on their assessable value.
On their re-export, the duty is refunded as drawback under Section 74 of the Customs Act 1962 at the rates depending upon the period for which they have been out of customs control. If the period exceeds 18 months, no duty is refunded as drawback.
Restore excise duty exemption on pre-cast activities carried out at construction sites which has been withdrawn vide Notice No 21/2006 dated March 1, 2006. It was exempted from excise duty under Heading 68.07 (now 68.10) since 1994 and extended up to February 28, 2006 vide Notification No.6/2002-C E dated March 1, 2002.
Exemption from levy of excise duty for water supply projects subject to a prescribed condition. This benefit has to be made part of Clause 6 to Rule 6 of the CENVAT Credit Rules 2004 so as to meet the object of the notification.
GTA services to the construction industry must be exempted from service tax.
Allow pension funds to invest about 10-15 per cent of their funds in infrastructure bonds
The secondary market for debt trading should be introduced, facilitating the infra developers to raise money through long term corporate bonds.
Refinancing of existing rupee loans through ECB should be allowed for the infrastructure sector.
PSUs disinvestment should be taken up and the proceeds from the same to be used to fund infrastructure projects.
Stocks to watch
Larsen & Toubro, Punj Lloyd, Hindustan Construction, IVRCL Infrastructure
Analyst expectation
The budget will increase the allocation for roads, irrigation, power and other infra sectors projects, auguring well for the industry.
Similarly, some of the tax benefits as expected by the industry, if materialised, will benefit the industry.
Summary
The government of India is all likely to continue its focus on the accelerated development of infrastructure in the Union Budget 2009-10; budgetary allocation in this regard will see a significant rise.
The construction industry is the major beneficiary of any measures to improve the infrastructure of the country.
Overall, the Budget is expected to be positive for the industry.
ALSO SEE
Budget 2009: Complete coverage
