The finance ministry is considering a range of tax incentives for such trusts in the budget that's to be announced on July 10, in line with its promise to create a framework of fast-track, investmentfriendly and predictable public private partnerships (PPPs) to build large-scale projects that are of vital importance for India to compete in global markets.
Though assets delivered through the PPP model and available for financing through securitisation have risen, Indian infrastructure firms are hard pressed with the development of existing projects delayed and the attractiveness of new projects diminishing for private sector funds and strategic operators.
"In order to provide a robust funding mechanism to the cash-starved sector, the government and market regulator Sebi (Securities & Exchange Board of India) will facilitate the securitisation of projects assets through infrastructure business trusts," said a person familiar with the development.
To raise long-term capital for the much-needed sector, the government will incentivise the creation of such trusts, so that investors will have a lower tax burden apart from avoiding multiple taxation at different levels. Infrastructure projects are now funded by bank loans, resulting in asset-liability mismatches in the banking sector.
The government has discussed the plans with senior officials of Sebi, Central Board of Direct Taxes and department of economic affairs to finalise the incentives. An infrastructure business trust will be set up as a trust and registered with the market regulator.
The regulator has proposed two categories of trusts. Category I trusts can raise funds through private placements from institutional investors only. These trusts can invest in multiple projects (at least two) that include those under construction as well as commercially-operational ones. The category II trust can raise funds from both local and foreign investors.
However, it can invest only in commercially-operational projects. It can invest in a minimum of four such projects. The proposed provisions will provide for the deferral of longterm capital gains tax on the exchange of shares of special purpose vehicles that own the infrastructure projects with the unit of the trust in the case of the trust's sponsor. However, capital gains arising from the disposal of the units by the sponsor would be subject to tax at normal rates.
The units of the trust (referred to as InvITs by Sebi) may be treated at par with equity shares, so as to attract the current benefit available under Section 10 (38) of the Income-tax Act.
This provides a preferential tax rate with long-term capital gains being exempt from tax and short-term capital gains being levied at 15%. This implies that unitholders will pay securities transaction tax at the time of transfer of units to another unit holder.
The trust will also be exempt from taxation of income earned in line with existing exemption for venture capital funds available under Section 10(23FB).
In the case of resident investors in InvITs, withholding tax would apply. In the case of non-residents, withholding tax on interest income from both investors as well as lenders of money to the trust may continue to be provided at the current level of 5% on the lines of concessional rates applicable to external commercial borrowings.