Exemption No. 1 is gone

Exemptions under Section 10 (23G) are meant to benefit those who finance infrastructure projects. It provides tax free interest, dividends and long term capital gains. The sop was introduced in 1998 to encourage investments in mega-projects. With the clause revoked, infrastructure capital companies and cooperative banks that invest in infrastructure projects may find these projects a lot less attractive. At least, this is what a concerned industry is saying on Budget day.

‘‘A 35 per cent tax rate on infrastructure financers, when compared with today’s 7.5 per cent total applicable tax is a huge shift. It will have a massive impact on attractiveness of infrastructure projects in the country,’’ says a senior manager at IL&FS.

Finance Minister P. Chidambaram said on Tuesday that the exemptions under were introduced during an era of high interest rates and high tax rates. With the tax rate as well as interest on borrowed funds down, overall cost of such projects has dipped too, leading to removal of the exemption.

Though exemptions across the board are on their way out, this is the one likely to lead to the loudest protests. Analysts say, the UPA government’s focus on infrastructure promotion on one hand, does not go with removal of benefits from long-term loan providers.

‘‘Infrastructure promotion is still a major thrust of the UPA government, so why should FIs be denied benefits. Interest rate has sunk from 12 to 8-10 per cent — that does not make for a 30 per cent hike in effective tax,’’ says Salil Gupta, an analyst with KPMG.

‘‘If infrastructure companies don’t offer a window to easy and affordable credit, the cost of credit goes up and eventually, specific infrastructure projects will suffer,’’ he says.