The UPA may have set an ambitious target of 15,000 MW of fresh power capacity in 2009-10 as part of its thrust on big-ticket spending on infrastructure projects to revive the flailing economy. But a decision by the Central Board of Direct Taxes (CBDT) to withdraw beneficial tax treatment to power projects executed on a turnkey basis with foreign partners, ostensibly to avoid its misuse, threatens to derail investments in the entire energy sector.

Citing misuse, the CBDT last week withdrew an internal circular of 1989 that dealt with taxability of income of non-residents executing power projects on a turnkey basis involving activities carried out in India and abroad. The move is expected to make executing infrastructure projects costlier, as the tax liability of foreign contractors will now increase. Tax experts pointed out that the decision would not only impact power projects but any infrastructure project being done on a turnkey basis, such as oil refineries, LPG contracts and even fertiliser plants.

Although the 1989-instruction was specifically for power plants, many courts of law allowed it to be used for other turnkey projects as the underlying principle was similar. “It will affect EPC contracts, especially those in the power sector where two or more foreign companies signed an agreement with Indian entities or PSU undertakings,” said Sandeep Ladda, associate director, PWC.

“This is the year of infrastructure; and foreign contractors are interested in exploring various opportunities in Indian infrastructure sector. Withdrawal will not only create uncertainty, but also increase the level of tax risk of doing business in India; and thereby, increase the effective costs of setting up infrastructure projects,” said Samir Kanabar, partner, Ernst & Young.

... contd.