Infra and Real Estate: Will the Budget '11 give stimulus?

Over the past few years, we have witnessed an increasing focus on infrastructure development of the country. For India, as a growing economy, infrastructure plays a critical role in the economic development. There is significant challenge that the infrastructure sector encounters in terms of the huge capital investment and long gestation period of the projects.  More so, for India, environmental concerns, land acquisition issues, frivolous litigation in terms of PILs add as roadblocks to the infrastructure growth in the country. 

In addition with a regime of high interest rates and high input costs (be it crude oil, cement, steel, etc), infrastructure growth is bound to suffer.  While some of these factors are not capable of being addressed through the annual budget, it can definitely support in improving the eco system by providing tax reforms and directional policy measures. The infrastructure industry is hoping for Government support to make the industry more entrepreneur and investor friendly this budget.

Another sector which is equally important for India and which will be driven by infrastructure growth is real estate.  India is perceived to be one of the emerging markets for real estate investment.  Mumbai, New Delhi and Bangalore have taken the 3rd, 5th and 10th spot respectively among the top investment cities.  These figures signify that there are huge investment opportunities in the real estate sector of India.

Both these sectors are hoping that the Budget provides a fillip to their growth.  Some such measures that could be considered in the Budget could be-

A) Infrastructure sector related

Exemptions to investors for investments in infrastructure

The Finance Act, 2006 had withdrawn the tax exemption available to venture capital companies and funds investing into certain infrastructure projects which was earlier available.  The rationale for the withdrawal was that, at that point of time, interest rates for capital in the sector were reasonable.  Once again, there is a need to revisit the policy to bring it in lines with the economic realities.

Extension of benefits to Limited Liability Partnerships (LLP)

The Government has recently introduced the LLP regulations permitting LLPs as a form of entity through which business operations can be undertaken.  While there is substantial interest growing in infrastructure companies for undertaking projects through LLPs, the current tax holiday regime is not available to LLPs.  Similarly, the exchange control policies and the foreign direct investment policy should be liberalised to permit lending to / investment in LLPs by foreign entities / investors.

Tax holiday rationalization for re-organisations

Certain infrastructure related businesses currently enjoy a 10 year income-tax holiday, which needs rationalization in various forms to make it more investor friendly.  A couple of years back, the Government had withdrawn this benefit from tax payers which succeeded the business in the event of a business re-organisation.

The thought process at that point of time was that the benefit was intended for an entrepreneur undertaking the risk of setting up the business vis-