Anticipating a Rs 600-crore notice from the Service Tax Department, IRB Infrastructure has moved the Highways Ministry. It has sought a clarification on the issue of levying service tax on highway toll revenues.
Mumbai’s service tax commissioner has asked IRB Infrastructure – the company developing over 6,400 km of highways – to pay service tax on its total toll revenues over a five-year period.
IRB, one of the top five highway developers by length, recently received a notice of Rs 60 crore for three of its special purpose vehicles (SPVs) that operate highways. It is likely to get a notice for another Rs 230 crore for the remaining seven operational SPVs, Virendra D. Mhaiskar, Chairman and Managing Director, IRB Infrastructure Developers, said.
Taking into account the penalty of an amount equivalent to the notice, the total service tax demand is likely to touch Rs 600 crore, said Mhaiskar. The tax has been levied at the rate of about 10-12 per cent on entire toll receivables of the three SPVs. “Such an outgo from our toll collections will render all projects completely unviable,” he added.
Remedial action
IRB has approached the Highways Ministry and National Highways Authority of India, and will also lodge an appeal with the Service Tax Tribunal.
Incidentally, the Finance Ministry had clarified on February 22, 2012, saying that highway toll revenues being collected by SPVs or concessionaires of NHAI would not attract service tax if the tolls were being collected by the SPV itself. In fact, this activity also forms a part of the “negative list” on service tax.
Moreover, even if the SPVs of highway developers employ companies to collect toll, then the service is applicable on the “expenditure or cost towards the activity of toll collection and not the entire toll collection itself,” Mhaiskar said.
Many concessionaires, including Larsen and Toubro and IL&FS Transportation Ltd, sub-contract the collection of toll. They spend about one per cent of their total revenues on toll collection activity.
In the worst-case scenario, IRB says it can ask NHAI to compensate it under the “change of law clause” in the concession agreement. The clause says that if the developer has to take additional expenditure on account of change in law or in interpretation of law after the project has started, then the authority will have to compensate the concessionaire/BOT developer. The concessionaire’s SPVs operate the project for 15-30 years.
At close of trading hours today, the IRB Infrastructure stock was up 4.67 per cent at Rs 132.25 on the BSE.