Infra firms welcome increased Budget allocation, but MAT worry looms

Higher allocation and refinance, plus tax rebate on infrastructure bonds, were the key benefits for infrastructure companies in the Budget.

Infrastructure companies have welcomed the increase in allocation, but are disappointed over increase in minimum alternate tax (MAT) from 15% to 18%. However, MAT may not be a significant issue, suggests a tax expert.

“From the infrastructure point of view, the Budget is a good one, except for the increase in MAT,” said Virendra Mhaiskar, chairman and managing director, IRB Infrastructure.

“Higher MAT will be a deterrent for (setting up) special purpose vehicles (SPVs). It goes against the benefits of providing a tax holiday to SPVs. I think that the impact would be around 2% to 3%,” said Parvez Umrigar, managing director, Gammon Infrastructure Projects Ltd.

The increase in MAT holds importance to infrastructure companies as most new road projects are started under a new SPV. SPVs are the worst affected by the increase in MAT. However, tax experts believe the increase in MAT will not severely affect the sector, as the tax-holiday period has also been increased and more finance opportunities have opened up.

“With the increase in the MAT rates, cash flows will be impacted. However, the tax-holiday period has also been increased from seven years to 10 years. With the earlier seven-year tax holiday, the loss of MAT benefit for three years became a tax cost, which will no longer be the case,” said Samir Kanabar, Partner - tax regulatory services, Ernst & Young.

“Though the cashflow is affected, they have also asked India Infrastructure Finance Company Limited (IIFCL) to refinance infrastructure loans. Projects will gain more momentum with this finance. I don’t see it as a huge impact because your surcharge has come down .The effective difference would be less than 2%” said Mr Kanabar.

IIFCL’s disbursements are expected to touch Rs9,000 crore by end-March 2010 and reach around Rs20,000 crore by March 2011. IIFCL refinanced bank lending worth Rs3,000 crore to infrastructure projects during the current year and is expected to more than double that amount in 2010-11.

Deduction of an additional amount of Rs20,000 would be allowed, over and above the existing limit of Rs1 lakh for tax savings, for investment in long-term infrastructure bonds as notified by the Central Government.  On the whole, the Budget is positive for infrastructure companies. “The infrastructure bonds would help in garnering money. The Rs20,000 tax benefit is welcome. It is a dedicated, separate instrument; nothing else is going to buy out the attention and this is significant,” said Mr Umrigar.

Road developers are expecting further changes in investing policies for infrastructure bonds. “Of course, our wish-list at some stage in the future would be to get the same benefit on long-term infrastructure bonds, which is now restricted to banks and NBFCs. The dedicated infrastructure developer should benefit. That is something that I would like to see gradually,” added Mr Umrigar.

On the BSE, GMR Infrastructure closed at Rs54.80, up 2.43% from the previous close of Rs53.50. Gammon Infrastructure closed at Rs24.90, up1.43%. IVRCL closed at Rs321.85, up1.12%. Nagarjuna Construction Company closed at Rs153.65, up1.82%.

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    Budget gets mixed reviews from health insurers; service tax will put off hospitals

    The finance minister paved the way to increase the benefits for NREGA workers and raise the Plan allocation for the health ministry.

    Finance minister Pranab Mukherjee has presented his Budget and most industry sectors are happy with his proposals. The Union government intends to increase the health benefits to workers under the National Rural Employment Guarantee Act (NREGA) and raise the Plan allocation for the ministry of health and family welfare. However, there is a mixed response to Mr Mukherjee’s Budget on other counts.

    Mr Mukherjee announced an increase in the Plan allocation for the ministry of health and family welfare from Rs19,534 crore to Rs22,300 crore for 2010-11. “This would help in improving the health-care delivery mechanism which will indirectly help health insurers to serve their clients better,” said Krishnamoorthy Rao, chief executive and managing director of Future Generali India Insurance Co Ltd. However, S Sreenivasan, chief financial officer of Bajaj Allianz General Insurance, argues that the amount allotted is inadequate and an increase of Rs3,000 crore would hardly cover inflation.

    Most insurers are concerned over the service tax on payments made to hospitals, arguing that it could increase the cost of the customer. “Specific to the general insurance industry, the clarification that no tax will be levied on unrealised investment income is a welcome step; this will free funds for investment in infrastructure and social sectors.  There is also a proposal to impose service tax on payments made to hospitals under health insurance schemes, which could push up costs for end customers,” said Bhargav Dasgupta, managing director and chief executive, ICICI Lombard GIC.

    Mr Rao echoes the same view: “There had been no major changes for health insurers. The service tax on payments made to hospitals will push up the cost to the end customer.” Mr Sreenivasan argues that bringing health insurance costs under service tax will dissuade many hospitals from approving cashless transactions.

    “At a macro level, a responsible and a well-balanced Budget for the common man. The middle-class will have a huge investible surplus in their hands because the lower income-tax levels. This money can get channelized into a whole lot of investment options, including life insurance,” Rajesh Relan, managing director, MetLife India Insurance Company Limited, said.

    In view of the success of the Rashtriya Swasthya Bima Yojana (RSBY) scheme, the Union government plans to extend its benefits to NREGA beneficiaries who have worked for more than 15 days during the preceding financial year, in a move to provide health insurance cover to below-poverty-line workers and their families.

    “The government’s agenda of inclusive growth has been reinforced with increased social spending and welcome measures like extension of the Rashtriya Swasthya Bima Yojana health insurance scheme to NREGA beneficiaries,” said Mr Dasgupta of ICICI Lombard GIC.

    The Union government had launched RSBY on 1 October 2007, and so far more than 1crore smart cards have been issued under this scheme. The main focus is on 18 states that have weak public health infrastructure—Arunachal Pradesh, Assam, Bihar, Chhattisgarh, Himachal Pradesh, Jharkhand, Jammu and Kashmir, Manipur, Mizoram, Meghalaya, Madhya Pradesh, Nagaland, Orissa, Rajasthan, Sikkim, Tripura, Uttarakhand and Uttar Pradesh.

    “Widening this scheme is certainly helpful to increase the base as well as give protection to more people from the deserving sections of the society.  For insurers, this would help in increasing the pool of health-insurance premium,” said Mr Rao of Future Generali.

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    Budget dishes out a mixed bag for real estate

    The Budget has extended the tenure of the tax benefit for residential projects, hiked the allocation for slum re-development schemes, and extended the 1% interest subvention for affordable housing

    Share prices of real-estate companies started shooting up after the Budget announcement because of three factors: the Budget has extended the tenure of the tax holiday enjoyed by developers;  the allocation for the slum redevelopment scheme (SRS) has been increased to Rs1,270 crore from Rs150 crore; and the 1% interest subvention for affordable housing has been extended by one more year to March 31, 2011.

    The tax-free profits being earned by builders and developers from ‘affordable housing’ projects were earlier available only for projects approved before 31 March 2008, and the project had to be completed within the next four financial years. The deadline for completion of projects has now been extended to five years.

    “For the housing sector, the benefits under Section 80-IB of the Income Tax Act have been extended for a year, which will be beneficial to developers focusing on the affordable housing segment.  The extension of the 1% interest subvention scheme on housing loans up to Rs10 lakh (and where the cost of the property is under Rs20 lakh) is a welcome measure. It is encouraging that the government is increasingly focusing on the acute housing shortage. This is reflected in increased outlays on the Indira Awas Yojana, focus on rural housing and the Rajiv Awas Yojana for reducing slums in urban areas,” said Renu Sud Karnad, managing director, HDFC Ltd.

    Following the Budget proposals, DLF Ltd and HDIL gained 3 each while Unitech ended up 2.20%.
    “We would have been even more grateful for the re-introduction of the 80 IB (10) tax benefit scheme, first implemented in 2001, which was definitely a boost for developers of affordable housing. Nevertheless, the fact that existing incentives continue to be in place, is positive,” said Anuj Puri, chairman and country head, Jones Lang LaSalle Meghraj.

    The government has extended the tenure for tax benefits by one year due to the slowdown in the real-estate industry. But it remains to be seen how developers utilise it—whether they speed up their projects or let them drag on in the hope of higher valuations. “The extension of the tenure for tax benefits and the 1% interest subvention on housing loans will boost the real-estate industry,” said Pankaj Kapoor, founder of research firm Liases and Foras.

    “Looking at the number of affordable housing projects launched by HDIL over the last few years in the Vasai-Virar region of Mumbai, this tax break will definitely add to the bottom-line of the company. The 1% interest subvention given for affordable housing will also boost demand,” said Sarang Wadhawan, managing director, HDIL.

    “It is an action from the government to help developers who were in bad shape during the past year, by providing one year extra to complete their projects. It is a good initiative, but we also expected that the government will take into consideration the new projects which came up in 2009,” said Samantak Das, national head - research, Knight Frank (India) Pvt Ltd.

    Commercial development in residential projects has also received a boost from the Budget, as the developers can either consider 3% of the total built–up area or 5,000 square feet—whichever is higher—for constructing commercial projects in a residential complex. Now, one can expect more commercial development in residential projects, especially big townships.

    “Earlier, under section 80-IB, in a residential complex, any commercial built-up area of more than 2,000 square feet or 5% more than the total built-up area—whichever is less—had to be considered for tax benefit. This year, they have changed the provision. Now 3% of the total built–up area or 5,000 square feet (whichever is higher) has to be considered,” said Samantak Das of Knight Frank.
    The share price of Housing Development and Infrastructure Ltd (HDIL), which is active in slum rehabilitation scheme (SRS) projects, gained on the bourses on Friday, after the allocation for slum redevelopment was increased from Rs1,50 crore to Rs 1,270 crore  in the Budget for 2010-11. 

    “Increase in the allocation for slum rehabilitation is aimed to provide housing to slum-dwellers through state governments. This will definitely impact the entire slum rehabilitation policy, but overall the focus of central governments to provide a slum-free country will benefit projects which have been delayed or derailed for various reasons. The onus of providing a slum-free India has been put on the state government,” said Mr Wadhawan, managing director, HDIL.

    “Overall the budget is positive but the service tax is one thing which is worrying the industry,” said Pranay Vakil, chairman, Knight Frank (India).

    However, the industry has reacted negatively to the imposition of service tax under four categories. “The first is a 10% service tax on commercial rented properties.  Second, a consumer has to now pay 10% service tax if he wants a premium location (like sea-side view, higher floor, etc.) or luxury amenities in a residential complex. Third, the consumer has to pay 10% tax if he is buying an under-construction property.  Lastly, the developer has to pay 10% service tax if he is developing a property on leased land,” said Mr Vakil.

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