Group taxation regime for infrastructure

Tax consolidation for special purpose vehicles is desirable

In a move that could redefine the landscape of infrastructure development in India, the government would do well to consider introducing a group taxation regime for the sector under the Income Tax Act, 1961. This format is already embraced by many of the world’s economic powerhouses.

A company that produces biscuits, shoes and steel pipes can run each of these businesses as stand-alone divisions of the parent company; and from a taxation point of view, consolidate their profits and losses to arrive at a single assessable taxable value. Now consider an infrastructure player. Any medium-sized player will have 20 to 30 special purpose vehicles (SPVs), while larger players may have to contend with over 50 of them at any point of time. These SPVs are so called because they represent a stand-alone project. Infra developers operate across a variety of SPVs, encompassing a spectrum of operating contracts  — from a simple construction project to more complicated concession agreements, especially under public-private partnership dispensations.

Such concessions, or contracts, can become quite complicated, as concession-granting authorities, financiers and regulators insist on isolating each project as a separate legal entity with specific cash flows, loan liabilities, and deliverables. The difficulty is that with each SPV being a separate legal entity, every one of them has to file a separate income tax return. Moreover, infra companies prefer to operate with a portfolio approach, balancing the potential profits and losses of different projects over long time periods to give an overall acceptable return. But the “single SPV” status does not allow them to do so vis-à-vis taxation.

This practice, while serving various regulatory and financial purposes, has inadvertently become a double-edged sword, creating business inefficiencies and stunting growth in this capital-intensive sector. Companies operating across diverse domains, such as power, ports, and airports, are compelled to create separate SPVs under a group holding company for each venture, leading to a labyrinth of legal entities and increased operational complexity. They find themselves caught in a web of compliances, incurring significant expenses and effort in filing tax returns for each SPV.

Sometimes, projects are stalled for years due to adverse social, regulatory, or political issues. Such projects result in sunk costs and a need for more working capital to be provided by the corporate group. The inability to offset losses from one business against profits from another within the same group creates tax inefficiencies and distortions. Financial difficulties, or a non-performing asset tag for one SPV can impact the credit rating of the entire group, making it challenging to secure more funding. Thus, the benefits of a “portfolio approach” to managing a clutch of businesses are lost in this maze.

From an economic perspective, all SPVs are nothing but divisions of the same parent company, albeit operating though separate legal structures because of mandatory requirements. Thus, by introducing a consolidated group tax regime, the business can preserve the benefits of common managerial control and shared group resources attributable to a single economic unit.

The proposed group taxation regime aims to address these issues by allowing a group of wholly or majority-owned companies to file a consolidated tax return and be considered a single entity for tax purposes. Under the proposed regime, the parent entity would be responsible for filing the consolidated tax return. All Indian subsidiaries consolidated with the parent entity would be included in this return, ensuring consistency and comprehensive coverage. The consolidated accounts prepared for Indian entities following applicable accounting standards would serve as the basis for tax computation, with necessary adjustments made in line with income tax provisions. Intra-group transactions would be eliminated for tax return purposes, simplifying the overall process and reducing the potential for disputes. The taxable income or loss would be computed for each entity within the consolidated group and then combined to arrive at the group’s overall income or loss.

To rationalise tax rates under the proposed scheme, it has been suggested that the consolidated group taxation rate be set at 22 per cent plus the applicable surcharge and cess. This would align with the current concessional tax regime under section 115BAA of the Income Tax Act, while potentially offering greater benefits through consolidation. The proposed reset should also address the treatment of brought forward losses and credits of minimum alternate tax during the transition to the consolidated group tax system. These losses could be carried forward by the parent company for the remaining eligible period, while credits can be allowed at one go. Existing restrictions on the set-off and carry forward of losses would continue to apply, maintaining consistency with current tax principles.

The potential benefits of this tax reform extend beyond mere administrative efficiency. By aligning India’s tax policy with global best practices, the government would be able to attract more foreign direct investment into the sector.

Critics may argue that such a significant change to the existing tax system could lead to potential revenue loss for the government. However, proponents of the reform contend that the long-term benefits, including increased investment, enhanced ease of doing business, and accelerated infrastructure development, would far outweigh any short-term revenue implications.

It is reliably understood that this proposal is currently under active consideration, with stakeholders keenly awaiting further developments. From an international perspective, six out of the eight largest economies (i.e. excluding India and China), six members of the G7, and 10 of the G20 have already adopted some form of group taxation. Therefore, the suggestion can be adopted as a progressive tax reform, in line with best international practices.

It is abundantly clear that introducing such a group taxation regime could pave the way for a more prosperous and developed nation in the years to come, by making it easier for private capital to operate in the difficult infrastructure sector.

The writer is an infrastructure expert. He is also the founder and managing trustee of The Infravision Foundation. Dhiren Shah contributed to this piece