EFFECT STARTS OF BAD BUDGET ON WORKS CONTRACTOR

Highway contractors are feeling the heat of a Union Budget move that has taken away the benefit of a 10-year tax-break for all road projects undertaken as work contracts. The move is considered particularly harsh because the tax breaks have been withdrawn with retrospective effect from April 1, 2000. The matter was recently taken up at an inter-ministerial meeting of the Highways Ministry with officials from the Fi [...]Highway contractors are feeling the heat of a Union Budget move that has taken away the benefit of a 10-year tax-break for all road projects undertaken as work contracts.
The move is considered particularly harsh because
the tax breaks have been withdrawn with retrospective effect from April 1, 2000. The matter was recently taken up at an inter-ministerial meeting of the Highways Ministry with officials from the Finance Ministry, including the Central Board of Direct Taxes, the National Highways Authority of India and industry representatives. Usually, the Government awards highway contracts as build-operate-transfer (BOT) projects or as works contracts. Under BOT, the highway developer builds and operates a highway stretch for a particular period and transfers it back to the Government at the end of the concession period. The developer may undertake the construction work himself or sub-contract it to other highway developers.
In a works contract,
the Government pays the highway developer only to build and widen the highways. Since April 1, 2002, a tax holiday has been available to highway developers in the form of a deduction of the entire profits derived from their infrastructure companies for 10 consecutive assessment years. So, several developers who undertook projects through works contract (without operating and maintaining the highways) also enjoyed the tax-breaks under Section 80 IA. But Budget 2009-10 clarified that Section 80 IA benefits will not be available to works contract awarded by any agency, including the Central or State Government. This comes into effect retrospectively from April 1, 2000.
Simply put,
the Government has brought profits from works contracts undertaken in the last 10 years under
the tax net. PREVENTING MISUSE The Budget move is aimed at preventing the misuse of the tax holiday under Section 80 IA. Also, the tax department has taken the stance that all profit-based benefits, including Section 80 IA, are prone to be misused and should be plugged. However, in India, tax policy considerations are driven by a number of objectives, including attracting private funding for infrastructure development.
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