Union Budget Provides Funding Blueprint For National Infrastructure Pipeline But Tax Proposals Could Hit Domestic Investors In InvIT


Union Finance Minister Nirmala Sitharaman in her budget speech provided some details of how the government’s ambitious National Infrastructure Pipeline (NIP) is likely to be funded.

Earlier this December, the finance minister had unveiled the NIP at 103 lakh crore involving 6,500 greenfield and brownfield infrastructure projects that will be identified and executed over the next five years.

During the budget speech, finance minister Nirmala Sitharaman announced the tax exemption for infrastructure investments in India.

“In order to incentivise the investment by the Sovereign Wealth Fund of foreign governments in the priority sectors, I propose to grant 100% tax exemption to their interest, dividend and capital gains income  in respect of investment made in infrastructure  and other notified sectors  before 31st March, 2024 and with a minimum lock-in period of 3 years.” the Finance Minister said.

Over the recent years, Sovereign Wealth Funds (SWFs) have shown an increasing appetite for  infrastructure investments thanks to a combination of stable, predictable cash flows, superior returns to bonds, and low correlation with the market.

During the budget speech, the finance minister also announced 22,000 crore as equity support to two government-owned infrastructure financing agencies, which will help them mobilise 1-lakh crore. This is likely to create a major source of long term debt for infrastructure projects and fulfil a  long awaited requirement.

“This would cater for equity support to Infrastructure Finance Companies such as India Infrastructure Finance Company Ltd (IIFCL) and a subsidiary of National Investment and Infrastructure Fund (NIIF). They would leverage it, as permissible, to create financing pipeline of more than 1-lakh crore. This would create a major source of long-term debt for infrastructure projects and fulfill a long-awaited requirement.” Finance Minister said during her speech

The ₹22,000 crore as equity support to infrastructure finance companies can be potentially further leveraged atleast 2-3 times by likes of NIIF and IIFCL for further investment and lending into Infrastructure sector.

The finance minister also announced that the at least 6,000 km of highways will be “monetised” before 2024. In the In the NIP, 19 per cent of the investments (or 1-lakh crore) was earmarked to be channelised to road sector.

Only couple of days earlier, the Union minister of Road Transport and Highways of India Nitin Gadkar had announced that Nationwide Highways Authority of India (NHAI) targets to mobilise ₹15,000-20,000 crore through its maiden Infrastructure Investment Trust ( InvIT) offering and will eventually scale up this funding model based on the response received from the investors.

NHAI currently addresses its funding requirement through ToT (toll-operate-transfer, partnering NIIF (National Investment and Infrastructure Fund), issuance of bonds to LIC and central budgetary allocations. The allocation to Roads & Highways has been increased by 8,807 crores

Through the InvIT route, NHAI will now now have an another funding route by mobilizing additional resources through capital markets to monetize its completed and operational National Highways projects. NHAI is expected to monetise projects that have a toll collection track record of atleast one year or were NHAI reserves the right to levy toll on the identified highway.

Given that InvIT is expected to help NHAI attract patient capital (for say 20-30 years) to the Indian highway market, the fallout of budget proposal to abolish  Dividend Distribution Tax (DDT) could result in taxing the dividend received by unit holders of InvIT formed via 100% SPV. In the earlier scheme of things such dividends were not liable to DDT  nor taxable either in the hands of REIT/InvIT or investors.