Pre-budget 2017 expectations

Smart Cities

Despite the variations in investment quantum across cities, there are some common threads which run through most of the Smart City plans. The most important one is around financing. Even after considering Government of India and counterpart funding from the State Government as well as the municipality, for most cities there exists a financing gap of at least 20% of the total investment plan, which would need to be met through private participation. In absolute terms, this would translate to over Rs. 200 crores for 100 cities, across areas like water supply, sanitation, solid waste management, mass rapid transit systems. Many of these projects are proposed to be awarded on build operate transfer (BOT) or build, own operate (BOO) basis, leading to a further increase in associated risks.

The forthcoming budget provides a good opportunity to incentivize potential private partners by exempting income arising out of such investments from tax. With exemptions under section 80 IA being phased out from April, 2017, the Government may consider extending benefits similar to what has been extended to specific housing projects under Section 80IB-A to all Smart City projects. This would also ensure that exemptions are only granted to projects which are approved and also completed within a specified time frame, thereby encouraging timely implementation.

The other important component of financing where budgetary provisions could make a significant impact is earmarking a corpus for setting up a Smart City infrastructure guarantee fund. The fund could be used for guaranteeing loans availed by the Smart City Special Purpose Vehicle (SPV) as well as area development and pan city projects, provided certain basic eligibility criteria around finance and governance are met. Alternately, the credit enhancement facility being set up by Life Insurance Corporation of India (LIC), as announced in the last budget, could be extended to cover Smart City related bond issuances.

Finally, while it may not be relevant during the first couple of years, the Smart City SPV should be given a “pass through” status for income tax purposes as in the case of real estate investment trusts. Dividends declared by the Smart City SPV should also be exempted from dividend distribution tax at least till such time as 100% shareholding is with the Government.

Arindam Guha, Partner, Deloitte India

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