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Taxation & Incentives in Project Finance – Benefits & Strategies

Infrastructure projects enjoy several tax benefits and incentives to encourage private investment.

1. Section 80-IA Deduction (Income Tax Act)

Eligibility

Eligible Projects:

  • Power generation, transmission, distribution
  • Highways (BOT/HAM model)
  • Water supply, sewerage
  • Airports, ports
  • Telecom infrastructure

Benefit

100% tax deduction on profits for 10 consecutive years (out of 15 years from commencement)

Example:

EBITDA: ₹100 crore
Depreciation: ₹30 crore
Interest: ₹40 crore
Profit before Tax (PBT): ₹30 crore

Without 80-IA:
Tax @ 25%: ₹7.5 crore
Profit after Tax (PAT): ₹22.5 crore

With 80-IA (Years 1-10):
Tax: ₹0 (100% exemption)
PAT: ₹30 crore

Tax Savings: ₹7.5 crore per year × 10 years = ₹75 crore!

Impact on Equity IRR: Can increase by 2-4%!

Conditions

  • Must be developed through competitive bidding or awarded by government
  • Operations must commence before specified date

2. Accelerated Depreciation

Higher depreciation rates for infrastructure assets:

Asset TypeNormal RateAccelerated Rate
Power Plant5.28%40% (earlier 80%)
Solar/Wind10%40%
Roads10%- (not available)

Benefit: Reduces taxable income in early years

Example - Solar Plant:

Asset Cost: ₹500 crore

Year 1 Depreciation:
Normal: ₹50 crore (10%)
Accelerated: ₹200 crore (40%)

Additional Deduction: ₹150 crore
Tax Savings: ₹150 crore × 25% = ₹37.5 crore (Year 1)

Note: Depreciation is timing benefit (total depreciation same, just front-loaded)

3. Minimum Alternate Tax (MAT)

Problem: If company has zero tax due to 80-IA, still must pay MAT

MAT Rate: 15% of Book Profit

MAT Credit: Can be carried forward for 15 years and set off against future tax

Example:

Year 1-10: Pay MAT (80-IA benefit limited)
Year 11-15: Normal tax, use MAT credit to reduce tax

4. Tax Holidays for SEZ Units

  • Projects in Special Economic Zones (SEZ) get:
    • 100% tax exemption for first 5 years
    • 50% for next 5 years
    • 50% of ploughed-back profits for next 5 years

5. Customs & Excise Duty Exemptions

Import Duty Exemption:

  • Solar panels, wind turbines: Concessional duty (5% vs 20%)
  • Mega power projects: Equipment import duty exemption

6. GST Input Credit

  • Can claim Input Tax Credit on capital goods purchased
  • Effective cost reduction: 18-28%

Summary

  • Section 80-IA: 100% profit exemption for 10 years (worth ₹50-100 crore)
  • Accelerated depreciation: Front-loads tax savings
  • MAT: Limits 80-IA benefit but provides MAT credit
  • Tax planning crucial for maximizing project returns

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