Core sector projects likely to cost more

This will shoot up lending rates to these projects by 0.25-0.50%.

Cost of infrastructure projects may go up as the lending rates for these projects are likely to rise by 0.25 to 0.50 per cent due to withdrawal of certain tax benefits to infrastructure financing in the Budget.

The Budget has proposed to take away the tax benefit to these projects under section 10(23G) of the Income Tax Act.

"We expect a 0.25-0.5 per cent rise in rate due to withdrawal of tax exemption on interest," Punjab National Bank Chairman SC Gupta told Business Standard. The bank will review its lending rates on a project-to-project basis.

The withdrawal of exemption will have a higher impact on lenders with concentrated infrastructure funding. IDFC expects its effective tax rate to go up by 3-4 per cent.

"For the next fiscal year, the effective tax rate could rise by 3-4 per cent if the proposed withdrawal of exemption is approved," IDFC's Rajiv B Lall said.

Development banks and infrastructure funds may face an increased tax burden as even long-term capital gains of an infrastructure capital fund may lose tax exemption on this count.

All banks and financial institutions are expected to pass on the increase to the borrowers. IDBI executives said the impact could be marginal. "We will review the rates after the Finance Bill is passed. At this stage, we are not considering a change in rate," VP Shetty, chairman, IDBI, told Business Standard.

The industry sees the move as part of a larger move to do away with exemptions in a phased manner.

After the Minimum Alternative Tax (MAT) rate was raised to 10 per cent from 7.5, infrastructure projects, which enjoy various tax exemptions or housing projects referred to in sub-section (10) of section 80-IB of the Income Tax Act, or a hotel project or a hospital project, and those approved by the central government will not only face a higher MAT but also face a marginal increase in the borrowing cost.