There is a need for a quick and efficient dispute resolution system

The potential growth in the Indian infrastructure sector presents a promising investment opportunity for private sector players, including foreign investors, says Abhishek Goenka, Partner, PwC India.

What are the steps that have to be taken to make infrastructure projects a more bankable proposition for the private sector?
A number of steps have to be taken to improve the bankability of infrastructure projects. The first step is to have a nodal agency to resolve the legacy issues because of which the projects are stuck or are NPAs. This will ensure that capital locked into these projects is released for fresh projects and will increase the confidence of banks in lending to infrastructure projects.

There is also a need for a quick and efficient dispute resolution system which ensures timely compensation of the affected party. This will ensure there is no delay in projects. Also, there is scope for having a better contractual framework which is enforceable and covers the risks adequately.

By when will the infra market space in India become mature enough for private sector players to participate and bid for road, bridge, rail and national highway creation projects on a PPP model? What more can the government do?
The Government of India has taken commendable steps to re-invigorate the Indian infrastructure sector for private and foreign participation. In order to ensure that the plans and policies actually translate into action at the ground level, it is important for the government to maintain its thrust on execution.

Some of the key suggestions to address the important challenges and revitalise the infrastructure sector as a bankable proposition for private sector are summarised below:

• Dedicated advisory body for infrastructure sector: A dedicated advisory body with a long-term mandate to focus on the infrastructure sector would be critical to identify bottlenecks, concerns and challenges faced by the private players in the extant PPP framework and to deliberate on potential solutions based on global best practices and analyse their feasibility in the Indian context (through joint consultation with all stakeholders).
• Capacity building initiatives: This is to achieve unity in action at policy formulation and administration level; administrative staff need to be sensitised and made aware on the need to adopt a collaborative approach with private players for infrastructure development.
• Dedicated and speedy dispute & claim resolutions mechanism: This is critical to attract capital on a large scale and for complex projects.
• Designing equitable risk allocation mechanism: The PPP projects for infra need to work as a genuine partnership between the private sector & public sector, with mechanisms built in to balance risks as well as upsides for the private sector.
• Developing a strong debt capital market: This should include project bonds for access of long-term debt capital for infrastructure developers and projects.
• Easier exits from projects: This would enable private developers to recycle their capital and deleverage their balance sheets, and help decongest the system. InvITs (Infrastructure Investment Trusts) are one such model that should be encouraged.
• Creation of alternate models such as offering already operational projects as concessions: There is significantly greater quantum of capital available for operational projects at a more efficient cost of capital. The private players, in particular foreign investors, are more cautious on greenfield projects and operational projects will significantly increase the availability of capital.

India has its own set of challenges and it is imperative to remain open to policy innovation and framework calibration to develop India-specific workable solutions. On balance, the potential growth in the Indian infrastructure sector presents a promising investment opportunity for private sector players, including foreign investors. The success of the next phase of the Indian PPP story would now hinge on the speed and efficiency in addressing the key issues and prioritising action on some of the most pressing challenges.

The Indian government and the NHAI have already taken initiatives to support PPP growth, and over time, new models (Hybrid Annuity, Toll-Operate-Transfer) have emerged (and are still emerging) to address risk and challenges faced by the private sector players.

What are the GST implications for infrastructure developers and EPC contractors with first indicators suggesting a higher-than-expected effective GST tax rate?
Presently, both VAT and service tax are applicable on works contract which has resulted in higher tax burden and litigations for infrastructure projects. The Model GST Law specifically provides works contract to be a service which seems to put to rest as to how a particular contract involving both supply of goods and services should be taxed.

• Infrastructure projects (such as power, roads, railways, etc.), presently enjoy various concessions and benefits from the indirect tax perspective and the implications under GST would be dependent on the continuity of benefits under the new tax regime.
• Currently taxes (service tax and VAT) on works contract are charged on a taxable base ranging from 110 per cent to 150 per cent. However, under the GST regime, works contract is specifically deemed to be a service and consequently the taxable base would be only 100 per cent.
• Further, given that GST is a consumption-based comprehensive tax, the debate over intra-state works contract versus inter-state works contract is likely to end.

Could you identify the pain areas that still need resolution before the new GST regime comes into force?
The eligibility to avail credit seems to be restricted with regard to goods and services acquired for the purpose of construction of immovable property. The project cost may be impacted due to GST credit restrictions, which needs to be addressed in the final GST Law.

Again, free of cost supplies by project owners to contractors is likely to be liable to GST. The contractor may need to include value of such free supplies in the value of his services. This could increase the tax cost or the working capital requirements. Apart from the above, there are other issues in the Model GST Law which need to be addressed such as the complexities in valuation of services with related persons, documentation for inter-state movement of goods in a scenario wherein the timing for raising the invoice has not arisen yet, continuity of exemptions/concessions, etc.

How would GST differ for infrastructure developers vis-a-vis infra contractors?
There seems to be a restriction on the developer to avail input tax credit on goods & services acquired for the purpose of construction of immovable property. This could lead to higher tax costs for the infrastructure developers.

Is viability gap funding (VGF) going be indispensable for infrastructure development in India, post GST?
The need for VGF would be dependent on continuity of exemptions, eligibility of tax credits, rate of tax, other aspects of the Model GST Law and their ultimate impact on the infrastructure sector, which would be clear once the GST Law is finalised.