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Journalism of Courage
The UPA may have set an ambitious target of 15,000 MW of fresh power capacity in 2009-10 as part of its thrust on big-ticket spending on infrastructure projects to revive the flailing economy. But a decision by the Central Board of Direct Taxes (CBDT) to withdraw beneficial tax treatment to power projects executed on a turnkey basis with foreign partners,ostensibly to avoid its misuse,threatens to derail investments in the entire energy sector.
Citing misuse,the CBDT last week withdrew an internal circular of 1989 that dealt with taxability of income of non-residents executing power projects on a turnkey basis involving activities carried out in India and abroad. The move is expected to make executing infrastructure projects costlier,as the tax liability of foreign contractors will now increase. Tax experts pointed out that the decision would not only impact power projects but any infrastructure project being done on a turnkey basis,such as oil refineries,LPG contracts and even fertiliser plants.
This is the year of infrastructure; and foreign contractors are interested in exploring various opportunities in Indian infrastructure sector. Withdrawal will not only create uncertainty,but also increase the level of tax risk of doing business in India; and thereby,increase the effective costs of setting up infrastructure projects, said Samir Kanabar,partner,Ernst & Young.
Under the 1989 instruction,such consortia were not treated as an association of persons (AOP) for tax purpose,and so could pay income tax at a lower rate along with enjoying foreign tax credit. It also gave out tax sops on profits from sale of equipment and materials on an FOB basis,delivered at a port outside India as well as civil work contracts executed in India and contracts for erection,testing and commissioning of machinery. Fees paid by such consortia on planning,design and engineering services were treated as technical services and were not treated as royalty income for tax purpose.
