Indian Budget - A wish list remains just a wish list

March 1, 2008

Economic growth for 2007-08 has been pegged at 8.7 per cent, compared with 9.2 per cent in the last fiscal.
Although the macroeconomic fundamentals continue to be strong, holding on to this growth rate would prove to be difficult for the government with inflation and infrastructure staring in the face as the biggest challenges.
As per the 11th Five Year Plan, the infrastructure investment required is a staggering Rs 14,50,000 crore.
Government spending in this regard is woefully inadequate, severely constrained by fiscal, political and economic factors. Given this backdrop, it was expected that Budget would provide the necessary thrust and initiatives to bridge the investment deficit in the infrastructure sector.
The FM has extended the benefit of Section 80-IA tax holiday to hospitals. Consequently, hospitals located anywhere in India (except for specified urban areas) will be eligible to 100 per cent deduction for five years.
The exemption is made, subject to the condition of the hospital being constructed in accordance with local authority regulations and constituting a minimum number of bed capacity.
The benefit has been extended to encourage the growth of health facilities in non-metropolitan areas.
Section 80-ID has also been widened to provide a 5-year tax holiday for 2, 3 and 4-star hotels located in specified world heritage sites.
The same has been done with a view to encourage tourism in the country. The tax holiday will be available to hotels constructed anytime between April 2008 and March 2013.
One of the important amendments is mitigating cascading effect of dividend distribution tax (DDT), whereby the domestic parent company has to pay DDT only on the net dividend distributed i.e., after deducting dividend received from its subsidiary company.
This should help the infrastructure companies which often have a multi-tier corporate structure of holding companies and separate subsidiaries for different projects. However, the benefit of DDT is restricted to one level structure.
The rationale to restrict the benefit to only single level structures is unclear. Further, the benefit restricted to only a domestic parent company (which is not a subsidiary) would pose challenge and limit the benefits available to corporate.
This benefit introduced in section 115O is similar to erstwhile omitted Section 80M. However, it is narrower than Section 80M as the credit benefit from double taxation is available only to one tier domestic holding company.
From an overall perspective, this Budget has not lived up to the hype and expectations of the infrastructure sector in terms of specific tax incentives and sops.
It could have easily been path-breaking in terms of spurring desired investments to lift the crumbling infrastructure sector. Infrastructure merits a higher investment and generous tax incentives. To begin with, it was expected that the scope of section 80-IA would be expanded to include modernisation, up-gradation, renovation and repair of infrastructure facilities as being eligible for benefit.
The demand to expand the benefit of venture capital undertaking status under Section 10(23FB) to companies undertaking large scale renovations of existing worn-out infrastructure facilities has been given a go by thereby missing out on the possibility to tap the much required structured investments in the existing but degenerating infrastructure facilities.
Similarly, the exemption limit under Section 80C which could have been enhanced or modified in a manner to infuse higher funds to capital intensive infrastructure sector.
All in all, a lot has been done in the past years, albeit a lot more is yet to be done.