The National Highways Authority of India (NHAI) is contesting efforts by tax officials to impose an 18% levy on investors for upfront payments for road concessions, according to three sources familiar.
The authority has written to the Ministry of Finance, highlighting a clause in the model concession agreement for toll, operate, transfer (TOT) contracts that obliges the NHAI to do its best to ensure that “no local tax, toll or charge is levied or imposed on the use of whole or any part of the project highway.”
The NHAI said that, since toll receipts are exempt from tax, it follows logically that a concession fee - which is calculated based on toll revenue - should also be exempt, one of the sources said. This comes after Goods and Services Tax Council officials visited concessionaires including Macquarie, as well as Cube Highways and Infrastructure, the sources said. In some cases, the meetings took up to four hours.
The issue has led to the NHAI extending the deadline for bids for two highway assets - the 11th and 12th instalments in a run of auctions in the TOT model - the first of which Macquarie won in 2018 with a USD 1.5bn bid. CDPQ offered USD 820m in March 2022 to secure its first TOT concession in India. The roads sector has drawn interest from the likes of the Canada Pension Plan Investment Board, the Ontario Teachers' Pension Plan Board, the Ontario Municipal Employees Retirement System, Singapore sovereign wealth fund GIC, Kohlberg Kravis Roberts & Co., and Global Infrastructure Partners.
Both the NHAI and potential bidders are awaiting clarity from the finance ministry, the sources said.
When the Goods and Services Tax (GST) Act was introduced in 2017, the government exempted toll revenue from being taxed. It also excused annuity payments related to the service of providing access to a road or a bridge. This was withdrawn with effect from 1 January this year.
The GST law limits exemptions to the service granting access to a road or a bridge on the payment of toll, according to a tax lawyer with law firm S&R Associates.
“The exemption does not extend to the activity of assignment of the right to collect toll revenue,” said Ajinkya Gunjan Mishra, a partner at the firm. “Therefore, an upfront payment that a concessionaire or an investor makes to be assigned the right to collect and appropriate toll revenue would presently attract GST at the rate of 18%.”
He said the NHAI will be responsible, as the supplier of the service, to pay the GST on the upfront payment it receives. The recovery of the tax will be an additional cost for the concessionaire, in the absence of a taxable output supply, said Mishra.
In the TOT method, an investor pays an upfront fee for a fixed concession period and assumes responsibility for operating and maintaining the assets. The NHAI has raised about INR 200bn (USD 2.4bn) from highway concessions since 2018, one of the sources said.
Indian roads are compelling investment opportunities, given their ability to partially hedge against inflation, KKR Partner and Head of India Infrastructure Hardik Shah told Infralogic last October.
The Ministry of Finance, the NHAI and Cube Highways did not respond to requests for comment. CDPQ and Macquarie declined to comment.