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Easy ECB norms on cards

Govt may also enhance ECB limit for large infrastructure project developers, reports KA Badarinath.

india Updated: Mar 20, 2006 15:01 IST

The Finance Ministry may consider providing tax breaks for infrastructure developers on interest earned from External Commercial Borrowings (ECBs).

The ministry may also consider the possibility of enhancing the ECB limit for large infrastructure project developers beyond the prevailing limit of US $500 million under the automatic route.

Sources divulged that these two major issues are being discussed for attracting known names in large infrastructure projects in sectors like ports, airports, power and roads.

In case Finance Minister P Chidambaram agrees to such a dispensation on ECBs, then the immediate beneficiaries would be developers of the five ultra-mega power projects with capacity of 4000 MW each.

Greenfield airport projects proposed in various metros, apart from modernisation projects being taken up for Mumbai and Delhi would also be beneficiaries of the possible relaxation.

Further, developers of major airports that are proposed to be set up on both west and east coasts would benefit from the relaxed ECBs dispensation.

Sources stated that institutional investors registered in countries with which India has double taxation avoidance treaty and taking exposure in large core projects may have to shell out tax on interest earnings at the rate of 10–20%.

If it is a domestic company or a 100% subsidiary of a foreign company promoting a large infrastructure project, then it will have to take tax liability up to 30% on ECB interest earnings.

Foreign companies or those operating through a representative office will have higher tax liability up to 40% plus surcharge.

Tax breaks on interest earned from ECBs may translate into overall lower investment costs and a cut in debt cost by 1–1.5% in an ultra- mega power project worth US $4 billion.

Tax concessions would also translate to lower power tariff that is currently being pegged at Rs 1.50 per unit.

The FinMin is considering the possibility of a higher ECB limit, in the range of $750 million to $1 billion under automatic route.

Even today, ECBs beyond $500 million is allowed through RBI approvals and FIPB as well as CCEA clearance.

Increasing ECB limits would make life easy for investors seeking to import equipment worth over US $1 billion in each of the ultra-mega power projects with suppliers' credit.

Another major issue that is being debated at highest level is to bring about depth in corporate bond market and enhance volumes in secondary market trades.

This will provide enough liquidity to promoters of projects that involve investment worth $4 billion and above.

Pressure from core sector project developers may in fact hasten the process of putting together a single, unified exchange-traded market for corporate bonds that has been promised by Chidambaram in his budget for next fiscal.

A host of these issues are expected to come up for deliberation in the PMO as Prime Minister Manmohan Singh has set May 30 as the deadline for sorting out all outstanding issues.