Government may relax tax rules for road developers

The government plans to ease tax provisions applicable to the road and highways sector, allowing developers to pay taxes in the concession period of a project, and not pay in advance.

In case of road projects being developed under HAM or hybrid annuity model, investors may be given an option to pay tax on income over a grace period of 25-30 years instead of paying taxes after completion of construction , two people aware of the development said on condition of anonymity.

The changes, he said, will probably be announced as part of the budget proposals for 2022-23, which will be presented by Finance Minister Nirmala Sitharaman on February 1. A finance ministry spokesperson did not respond to an email seeking comment.

Those mentioned above said the clarity on taxation for the road sector would provide greater liquidity to developers and boost their margins with the expectation that the surplus money would be deployed back to invest in other infrastructure projects.

Presently, in HAM projects, the concessionaire is compensated by fixed annuity payments during construction and O&M (Operation and Maintenance) phase. Forty percent of the construction annuity is paid during construction, and the remaining 60% is paid over the concession period.

The Goods and Services Tax Council recently clarified that manufacturing annuities are liable to GST, while O&M annuities are exempt. But there is ambiguity on the tax treatment of HAMs as the revenue is earned through fixed annuity from the National Highways Authority of India (NHAI) for construction and O&M components, not tolls.

It is expected that advance tax may be levied on construction completion by following the percentage of completion (POCM) on construction annuity, though 60% is received in the concession period.

Tax clarity by the Finance Ministry will allow HAM project developers to amortize their cost for development of such a facility as business expenditure over the concession period (excluding construction period). This will allow developers to avoid payment of advance tax which can be partly paid on receipt of annuity from NHAI as per the terms of the concession agreement.

With NHAI now preferring HAM over other models for bidding of road projects, the tax clarity is expected to revive investor interest in infrastructure projects as they can see higher return on investment and margin.