Contracting cos may have to adjust book profit by 10-15%

Sec80-IA clarification, which came in yesterday's budget, stipulates that companies executing just development work need to pay a full tax rate of 33.66%, reports CNBC-TV18's Tejal Badal. This payment comes into retrospective effect from April 1, 2000. Contracting companies may have to adjust book profit by 10%-15%.

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Here is a verbatim transcript of Tejal Badal's comments on CNBC-TV18. Also see the accompanying video.

I would like to stress more on Sec 80IA clarification that was given yesterday. According to this section, tax benefits on profits and gains derived from an infrastructure project are derived by an asset owner or developer for the project. This section was introduced mainly to attract lot of private partnership in infrastructure related projects. However, this particular section was not applicable to the companies that were undertaking civil construction work.

We had P Chidambaram, the ex-Finance Minister, who made this clarification in May 2007. Inspite of that, we had companies like Patel Engineering, IVRCL, and Simplex Infra for that matter who held a status of a developer and therefore went on to derive benefits of this particular section.

According to the announcement made yesterday, there were two clear points. One, companies that are infrastructure asset owners who are claiming Section 80IA benefits and are now paying 10% as MAT will pay and increased MAT of 15%. The second point is the clarification of who all can avail the benefit of this particular section. Only an entity that makes an investment in an infrastructure project is eligible for Section 80IA benefit. Any entity which merely enters into a contract or participating in completion of the project is not eligible for Section 80-IA. This particular amendment comes in from retrospective effect from 2000, so construction companies will have to pay an increased amount of tax from assessment year 2000-2001 onwards.

This clarification also means that the companies will have to pay full tax of 33% going forward.

Analysts' estimates won't change much because most analysts consider a tax rate of 30% for such sub-contracting companies as well. But companies will definitely have to make adjustments to their book profits and the analyst estimate the adjustments could be in the rate of 10-15%.