Developers in a consortium to be treated as separate tax units

This will enable these companies to set off losses from other projects and not attract the highest income tax rate.

In a major relief to infrastructure developers, the income tax department has clarified that companies which are part of a consortium in large infrastructure projects will be treated as separate taxable units.

This will enable these companies to set off losses from other projects and not attract the highest income tax rate.

In a clarification, the Central Board of Direct Taxes has now allowed the companies to be identified individually rather than as one taxable unit known as ‘association of persons’ or AOP.

Typically, consortiums are formed to implement large infrastructure projects in engineering, procurement and construction (EPC) contracts as well as turnkey projects.

The income tax department considered a consortium to be one separate entity for tax purposes while the companies’ preferred to be treated individually. This led to many tax disputes, which the tax department has now sought to address.

Pointing out that there are differing court verdicts on what constitutes an AOP, the tax department said that with a view to avoiding tax disputes and to have consistency in approach, it has been decided that consortium arrangements may not be treated as AOP, provided that each member of the consortium is independently responsible for implementing its share of work, earns a profit or loss for that work and has its own personnel.

Another criterion is that the control and management of the consortium is not unified.

“Large turnkey infrastructure projects are executed by consortiums of construction companies through EPC contracts. There are certain cases where the tax authorities have taxed all the consortium members as one taxable unit, that is as an AOP. This leads to a number of issues like being taxed at the maximum marginal rate, inability to set off losses of other projects, non-availability of tax credit for non-residents, etc,” said Hemal Zobalia, partner, Deloitte Haskins & Sells Llp, in a note.

“These issues bring in uncertainty and increase the overall tax cost. CBDT has sought to clarify the taxation of such EPC consortiums through this circular,” Zobalia added.

He said that the circular reiterates some of the principles which were already laid down by judicial precedents.

“However, this may not help in resolving all the issues surrounding AOPs as a lot is left to the discretion of the tax officer and the facts and circumstances of each case,” he added.

The move is also expected to attract more foreign investors to invest in infrastructure projects.

Akhil Sambhar, tax partner at EY, called it a positive move from the government.

“It is important for big projects like oil and gas where most of the work is done in a consortium. Any large project, be it power, metro or oil and gas, the magnitude of work is so much that the work needs multiple players. And with no clarity on taxes, it was leading to a large number of tax disputes,” he said.

“With this circular coming in, it will definitely encourage more foreign companies to come to India. In fact, it was a key issue for foreign companies working on EPC projects,” Sambhar added.

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