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India Cuts 40% Compulsory Tax Rate for Infrastructure Consortium Members

Companies who jointly participate in infrastructure projects in India will now be taxed as separate units. Each constituent company will now be taxed at the rate applicable to its own individual scope of work and based on its own individual share of income rather than that of the consortium as a whole. Previously, consortium members were taxed at a flat rate of 40%.

The announcement was made by the Central Board of Direct Taxes (CBDT) of the Indian finance ministry on 7 March 2016.[1]  This move is likely to attract higher foreign direct investment (FDI) in India’s infrastructure sector, including additional funding from Hong Kong. As part of the Make in India initiative, 100% FDI is now permissible in the construction sector.

Companies, including foreign firms, often form a consortium to implement turnkey projects or Engineering, Procurement, Construction (EPC) contracts. To qualify for treatment as a separate taxable unit, a constituent company in a consortium should independently be responsible for implementing its own distinct responsibilities as per the contract, earn a profit or loss for its specified scope of work, and employ its own resources, including personnel to carry out its specified scope of work. Furthermore, the control and management of the consortium should not be unified and any common management that may exist should do so only for the convenience of administrative coordination between consortium members.[2]

Previously, companies who were part of a consortium were assumptively identified as a single taxable unit or ‘Association of Persons’ (AOP). As a result, they were subject to the maximum tax rate of 40 per cent.[3] The latest move has, therefore, been viewed as intended to introduce uniform regulation, reduce costs and streamline the process of doing business. It is hope that this will open up the infrastructure sector to greater foreign participation.

In his meeting with the Confederation of Indian Industry (CII) in India in February 2016, Hong Kong’s Chief Executive stated that Hong Kong could play an important role in the finance and development of infrastructure projects in India.[4]

Infrastructure is a key driver for India’s economic goals and hopes for robust growth. India anticipates spending about US$465 billion on infrastructure development over the next five years, some 70% of which has been earmarked for power, roads, and urban infrastructure projects.  India’s Union Budget 2016 allocated US$32.9 billion to revive the infrastructure sector, while the Central government has increased the scope for private participation by removing regulatory hurdles and improving the business environment.[5] All of these, including these new tax regulations,  are seen as boosting the prospects for international investors.

[1]  Government of India Income Tax Department website

[2]  Government of India Income Tax Department website

[3]  Times of India, 15 March 2016

[4]  The Economic Times, 4 February 2016

[5]  Government of India Press Information Bureau website

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