CBDT clarifies on tax treatment of expenditure for developing infrastructure facility under BOT arrangement

This Tax Alert summarizes a recent Circular issued by the Indian tax administrative authority, the Central Board of Direct Taxes (CBDT), on the treatment of expenditure incurred by a taxpayer for developing infrastructure facility under a Build-Operate-Transfer (BOT) arrangement. The Circular clarifies that the taxpayer is not entitled to claim depreciation on such expenditure as the taxpayer is not the owner of such facility. Instead, the expenditure incurred may be amortized evenly over the period of BOT arrangement, and claimed as allowable expenditure under the Indian Tax Laws (ITL).

A circular issued by the CBDT is only binding on the Tax Authority and does not bind the taxpayers nor the Courts/Tribunal.

The view espoused by the CBDT in the present Circular is contrary to certain Indian rulings which have held that a right to collect tolls is a depreciable asset under the ITL.Further, under the proposed Direct Taxes Code, 2013 (DTC), any infrastructure facility constructed or set up by a taxpayer is eligible for depreciation at 15%/20% depending on tenure of the BOT.

Development of certain infrastructure facilities qualify for income-linked incentive deduction under the ITL. Furthermore, 100% tax holiday is granted in respect of projects involving development, operation and maintenance of road/highway project for 10 out of 20 years beginning from the year in which the specified activity begins. An accelerated expense deduction in the years prior to the year from which tax holiday commences may influence the quantum of tax holiday for the period after which tax holiday is claimed. Tax treatment envisaged by the Circular is likely to also influence the quantum of incentive deduction and, hence, requires impact analysis to be done on a case-to-case basis.

From an accounting perspective, Ministry of Corporate Affairs had, in 2012, notified projected revenue-based amortization for Toll Road BOT arrangement by classifying the same as“intangible assets.” The amortization under this method involves writing off the cost incurred on Toll Road based on the proportion of actual revenue for the year to the projected revenue till the end of concession period. The same method has been prescribed under new Companies Act 2013 with effect from 1 April 2014. Companies following this method are likely to have lower depreciation charge in their books in the initial years of concession period due to lower revenue and higher depreciation charge in the subsequent years when revenue increases from the project. Depreciation charge in the books follows the pattern of revenue generated from the project whereas for tax purpose the Circular provides for time-linked amortization. This mismatch will impact Minimum Alternate Tax (MAT) liability as also the calculation of Deferred Tax Asset/Liability.