Sunset clause

Sunset clauses in India are truly setting

EY
EY India

Multidisciplinary professional services organization

3 minute read 06 Mar 2023
Related topics
Tax

A robust tax framework will help generate interest from domestic and overseas parties.

In brief

  • While the government is taking long strides to boost the economy, equal participation is expected from the private sector.
  • A well-designed tax framework can prove to be a key factor in enticing private participation and ensuring stable policies, which in turn can generate interest from both domestic and foreign entities.
  • Many industries were anticipating extension of the sunset date for the concessional tax regime. 

With the vision of ‘Amrit Kaal’, the government allocated an unprecedented amount of INR 10 lakh crores toward capital expenditure in the country’s infrastructure— a 33% increase compared to the previous fiscal year. Out of which, the highest amount is allocated to the Ministry of Road Transport and Highways followed by the Ministry of Railways which comprises  approximately 50% of the total capital allocation1 . Among other major announcements, the government has announced significant allocation to encourage generation of new energy which is toward the path of achieving India’s target of net zero committed in global forums.

To reduce dependency on imported goods and technology, the government in 2019 had announced a concessional tax regime of 17.16% for new companies engaged in the manufacture/production sector. However, such taxpayers need to commence their manufacturing/ production operations by 31 March 2024. Several entities were encouraged to set up their facilities; however, the above requirement of commencement before 31 March 2024 was not feasible for many taxpayers as the country witnessed lock down at various stages and restricted movement between the year 2020 to 2022. 

Setting up a manufacturing facility itself is capital intensive and needs time, hence it was expected that the above time limit of 31 March 2024 will be extended by another three to five years. Such initiative could support provisioning of indigenous raw material, which in turn can support nation building and achieve ambitious targets in infrastructure. 

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Keeping in perspective the government’s green energy mission, reliance on indigenous products like electrolyzers, energy storage equipment may become critical for reliable source of energy. Such production would entail R&D, capital infusion, demand creation, etc., and hence extension of the sunset date for the concessional tax regime was highly anticipated by multiple industries. While on one hand application of aforesaid concessional tax regime has been extended to co-operative societies by proposing an amendment in the Budget proposal for 2023, the requirement of commencement of manufacture/ production by 31 March 2024 also applies for such taxpayers and it can be said that the window provided to commence operations is too short. To address these limitations, representations are made at various forums for the extension of aforesaid sunset date and suitable amendment is warranted in Budget for fiscal year 2024, if not by way of amendment at enactment stage of Finance Bill 2023.

 

Another important aspect from infrastructure standpoint is funding. Usually, large-scale infrastructure projects are awarded under a concession agreement under a public private partnership (PPP) model where the concessionaire is required to arrange for funds to develop the infrastructure. Even under the HAM model for road contracts, the government provides initial support only to the extent of 40% of the contract value and balance portion is to be arranged by the private developer. There are limited options for developers to arrange funds from local sources and one way to raise funds was from foreign portfolio / institutional investors, foreign lenders, etc. 

 

Certain form of borrowing under the extent foreign exchange regulations from such parties attracted a lower tax rate of 5% (plus surcharge and cess) on interest payable to foreign company’s if the agreement is entered into or funds are borrowed before 01 July 2023 or in case of foreign portfolio / institutional investors where interest is payable before 01 July 2023. While the government has announced setting up of infrastructure finance secretariat for more private investments in infrastructure, from a tax policy standpoint it could consider extending the concessional tax rate for borrowing from foreign countries at least for another year such that funding requirement in infrastructure building can be secured at reduced cost. As an alternative, finance from GIFT city could now be explored with renewed interest. 

 

This article is written by Neetu Vinayek, Partner and Tax Leader for Infrastructure and Oil & Gas sector, EY India with contributions from Manmay Y Chandawalla – Senior Manager, Global Compliance and Reporting, EY India.


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Summary

The government’s intent is clear – to phase out tax incentives and deductions and provide a stable tax regime. However, the current go-political and global economic situation may call for some relaxations in sunset clauses to encourage domestic growth and economy.

About this article

EY
EY India
Multidisciplinary professional services organization
Related topics
Tax

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