Highway project bidders will be permitted a depreciation of 10 per cent for claiming tax breaks beyond the tax holiday of five years. The residual depreciation beyond the concession period will have to be absorbed by the project promoters, bidders have been told by officials of the surface transport ministry .
Official sources said here that road project promoters had sought higher depreciation. Based on the current rate on a written down value (WDV) basis road projects will fully depreciate only by about 45 years. Bidders had sought a compensation for this transfer of the project at the end of the concession period through a payment of the residual value, or through higher rates of depreciation. Currently, projects have to be transferred free of cost at the end of the concession period to the project originators, the government .
The sources said that projects were already permitted a five-year tax holiday and a 30 per cent concessional tax rate, which could be availed of at any time during the first 20 years of the project concession period. This, effectively raised the tax benefits available to the promoters during the concession period.
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Besides, project promoters divesting their equity during the concession are also in a position to avail of tax benefits under Section 10 (23G) of the Income Tax Act. This section allows tax exemption on capital gains, dividends and interest receipts from infrastructure projects. Hence, the finance ministry was not prepared to accept demands from high project bidders that had a potential revenue impact. Promoters are allowed to divest equity up to 51 per cent during the construction phase and 33 per cent during the operation and maintenance phase
Besides, the sources also said that the 10 per cent depreciation offered for the remaining 20 years of the concession period was among the highest in the world. For instance, UK , which had initiated several highway projects on the basis of a `design, build, finance and operate' (DBFO) basis offered a depreciation of only 4.5 per cent on a WDV basis
The surface transport ministry has also said that since projects had different tenors ranging from 12 year to 30 years, adopting a system of amortising the project during the concession period was not practicable.
The bridge projects like the second Narmada bridge has a concession period of only 12 years.
The sources said that project promoters would have to bear any losses on account of the residual value of depreciation when the project is transferred back at the termination of the concession period. Even assuming that promoters are likely to incur a notional loss on account of the residual depreciation promoters will still be earning "attractive rates of returns" on the 77 projects that have been thrown open for private sector participation on a Build Operate and Transfer basis, the sources estimate . The minimum estimated project internal rates of return is expected to be in the region of about 18 per cent based on a minimum traffic flows, they added.