As days pass by after the budget was presented, more and more ambiguities, clumsy and incomplete amendments to the acts and their bizarre ramifications come to light. A mishandled budget is nothing but `sanctions' in disguise against our own business and industry. One such classic area where the government gingerly walked in and became a spoilsport is the section 10(23)g of the Income Tax Act relating to infrastructure.

A study conducted by World Bank on infrastructure financing shows that private capital is the main source of finance for the infrastructure projects of different countries. But after 1994, the flow of private capital is dwindling and major political and administrative efforts are made in developing economies to mobilise huge funds from the domestic and international sources to this sector.

There was no lessconcern in India too for giving ample impetus to infrastructure. But the recent amendment to section 10(23)g did exactly opposite of this.

Section 10(23g) was introduced in the Finance (No.2) Act 1996. Basically the act provided before this budget, exemption to infrastructure capital funds and companies, from tax on-income by way of dividends, interest or long- term capital gains from investments made by way of shares or long-term finance in any enterprise carrying on the business of developing, maintaining and operating any infrastructure facility.

The infrastructure facility again was specifically defined as `an enterprise carrying on the business of developing, maintaining and operating any infrastructure facility. Similarly the long-term finance was defined in a department circular as `any loan or advance where the terms under which monies are loaned or advanced provide for repayment alongwith interest thereof during a period of not less than five years'. This also included investment by way of bondsand debentures.

Such wide ranging crucial benefits built from Finance Act 1996 and further amended by the Finance Act 1997 after much deliberations on each provision were ruthlessly snatched away in the guise of `preventing misuse'.

In layman terms, in the earlier situation any company could invest in an infrastructure company by way of shares, debentures or bond or by way of loans or advances and get tax exemption on dividends, interest and long-term capital gains.

As is the case in every aspect of Indian life, a few devious Indian minds started stretching the fabric of gratis much beyond recognition as it didn't fit them in its normal shape and form. Sneaking through the labyrinths of semantics, they came out with interpretations that worked in cross purpose with the spirit of the act. But instead of going to the root and fixing them pointedly, across the board amendments meant the proverbial `medicine being worse than malady'.

Let us have a look at the amendments and its consequences:

Aninfrastructure capital company was originally defined to mean `a company as has made investment by way of acquiring shares or providing long-term finance to an enterprise engaged in the business of providing infrastructure facility.

Sudden wisdom dawned on our law makers and the section has been proposed to be amended so as to allow only those companies which have been established for the specific purpose of investing in infrastructure facility company, would qualify as infrastructure facility companies as one of their objects would not qualify for tax exemption. Except involving the paper work of a SPV, what the amendment achieved significantly is not known particularly while the exemptions have been given specifically on dividends, interests and capital gains relating to investments/loans to infrastructure facility companies, and not on the total income of the investor company.

Secondly, the infrastructure facility company is earlier defined as an enterprise carrying on the business of developing,maintaining and operating any infrastructure.

Somehow our law makers felt that fundamentally any company having other activities should not branch out into infrastructure as a division. For example; if a company like L&T decides to branch out into infrastructure and wants to avail the benefits it can't do so unless it floats a separate company for the same.

It is proposed that infrastructure facility company has to be an enterprise wholly engaged in the business of developing, maintaining and operating an infrastructure facility.

Above all the fatal blow was dealt in the withdrawing of exemption on secondary transactions and capital gains through the following amendment. The exemption is now available only to "interest of an infrastructure capital fund or an infrastructure capital company" from primary investments made by way of long-term finance in any enterprise wholly engaged in the business of developing, maintaining and operating an infrastructure facility.

Moreover it is not clear whether loansand advances could be covered because of usage of the term primary investment. Nor is it clear whether gross interest or the net interest which is exempted. Any way the bottomline is, probably except IFDC, even the banks and financial institutions which are the major sources of finance for an Infrastructure Project, cannot get the benefit of exemptions as they are not exclusively set up for infrastructure.

Anyway even going by the spirit of the amendment, it can't get more unimaginative and unthoughtful to say the least -- forcing an infrastructure company to resort to more borrowings and less of equity.

The argument that dividend is exempted anyway doesn't hold water because no one invests in an infrastructure company only for dividend. It is the inherent potential for value appreciation that attracts investment in equity, meaning thereby, a reasonable exit through capital gain Tax exemption is the chief advantage for such long gestation projects.

Thus our swadeshi budget imposed `sanctions' oninfrastructure projects while paradoxically declaring to do the opposite. May we call them the `swadeshi sanctions'?

(The author is presently a financial consultant specialising in Infrastructure projects)