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While we have become the fifth largest economy, the target is to become the world’s third largest economy by 2030. Given the rapid growth in public expenditure especially in the infrastructure space, it is quite clear that the aim of the government is to do so on the back of our ambition of becoming the next global manufacturing hub, which in turn would be aided by a single-minded focus on improving logistics and other core infrastructure required by the manufacturing sector to flourish.Indian Government has rightly prioritized “Infrastructure and investment” by terming it as one of the “Sap rishi” (i.e., Key Priority) in Budget 2023. The Government has also launched National Infrastructure Pipeline (NIP) and National Monetization Plan, established the National Investment and Infrastructure Fund (NIIF), introduced Infrastructure Investment Trust, combined with other initiatives to promote development of infrastructure in India.
Infrastructure projects are capital intensive, have a longer gestation period and call for a steady and patient flow of capital. With a view to facilitate this, Indian Government through the Budget 2020 introduced a new tax incentive provision (section 10(23FE)) in the Income-tax Act to attract long term investment for promoting infrastructure development in India. A complete tax exemption was provided to various income streams (interest, dividend, and capital gains) earned by notified Pension Funds and Sovereign Wealth Fund (“SWFs”) from investments in infrastructure sector, subject to certain eligibility conditions.
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While there are host of conditions, such as SWF and Pension Funds should be notified by Central Board of Direct Taxes, investments should be in specified infrastructure space or Infrastructure Trust or Alternate Investment Fund making infrastructure investments, investment should be held for more than three years, etc., one of the critical conditions for the tax exemption is that the investments should be made by SWF and Pension Funds before 31 March 2024.Post introduction of this provision, the Indian Government has made several modifications in the provisions with an aim to broad base the incentive (expansion of definition of infrastructure), provide clarifications on practical challenges faced, such that the real intent behind the introduction of the tax incentive could be achieved. In other words, Indian Government has been very receptive to the requirements of this sector and more specifically ensuring flow of capital from SWFs and Pension Fund through timely and efficient interventions.Over 35 applicants SWF / Pension Funds have been notified by the Indian Government.
While a lot has been done to develop infrastructure, India has only just begun to scratch the surface. Just to contextualize, it is expected that Infrastructure spend of India will increase to INR 143 Lakh Crores between 2024 to 2030 as compared to INR 67 Lakh Crores spent in 2017-2023. It is estimated that India will need to invest USD 840 billion into urban infrastructure over next 15 years. While the pressure on Indian cities for improvement of infrastructure continue to exist, with the advent of technology, even the Tier 2 and Tier 3 cities are likely to witness significant growth and consequential need of infrastructure.
The above expansion plans very clearly suggest that India will need a considerable, continuous, and steady flow of funds to achieve its infrastructure goals and thereby its dream of becoming USD 5 trillion economy and Vikshit Bharat by 2047.
While there are various avenues to garner this funding requirement, one chosen method by the Indian Government was soliciting funds from SWFs and Pension Funds. This option has significant advantages, since SWFs and Pension Funds are long term investors (unlike other investors, SWFs and Pension Funds can underwrite long term commitments), they expect definite returns, they are guided by long term vision and do not get affected by short term issues, which can crop up in any infrastructure project.
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In 2022, SWFs directly invested USD 6.7 billion in India. However, their exist significant potential and interest from SWFs and Pension Funds to make investment in India. Further, this investment would be required over a period of time and not necessarily before 31 March 2024, the sunset clause under the tax exemption provision.
The quantum of notified entities is a testament of interest of SWFs and Pension Funds to invest in infrastructure sector of India. While the interest is evident, our need is eminent, policy intervention to provide momentum from Indian Government is need to the hour. India needs to continue to extend favorable policy framework for the SWFs and Pension Funds to keep their investment focus on India.
The above factors make a compelling case for further extension of time limit for investments in infrastructure sector beyond 31 March 2024.
While the economic argument for the extension of the benefit exists, it will be interesting to see how and when the extension is provided as the Hon’ble Finance Minister Nirmala Sitharaman had recently noted that “no spectacular announcements” shall be made in the interim budget of 2024 prior to the general elections. The question hopefully is more of a when and not an if. The industry will look for either the extension to be announced in the interim budget or at the very least a clear statement of intent to do so as and when the final budget is announced post the election!
The author is Partner and Head, M&A and PE Tax and Nirmal Nagda, Partner, M&A and PE Tax, KPMG in India
