Income Tax hurdle now stands in way of bullet train project

Riddled with delays in progress, the prestigious bullet train project is facing another hurdle — Income Tax. The Japanese side, which is a partner in the project, has warned of “inevitable delays” if its multiple petitions seeking exemption from Income Tax provisions for its consultants engaged in the design aspects of the Mumbai Ahmedabad High Speed Rail (MAHSR) Project are not addressed.

Japanese Ambassador to India Suzuki Satoshi has written to Finance Minister Nirmala Sitharaman calling for a resolution of this impasse and has expressed concern that, if not resolved, the issue will “negatively impact” all projects approved under Japanese grants, apart from further delays in the bullet train project.

The consultants for whom the Japanese want exemption are employed with Japan International Consultants and JE, the two Japanese firms engaged in design aspects of the project and given a grant by the Japan International Cooperation Agency (JICA). It is not part of the loan that Japan has extended to India for the project. JICA is the Japanese government’s investment agency.

The crux of Japan’s argument is that its consultants should not have to pay taxes on income they receive and additional expenses they incur for doing a job that Japan is providing under a grant for an Indian project.

Japan has particular concerns regarding clauses 8, 8A, 8B and 9 of Section 10 of the Income Tax Act in the Finance Bill, which deal with exemption from Income Tax. These clauses talk about foreign nationals, among others, engaged in technical assistance to government projects and drawing salaries in India.

In the Finance Bill 2022, passed in the recent Budget Session of Parliament, these exemptions have been withdrawn, making the consultants liable for tax from this financial year onwards. The memorandum explaining the provisions of the Finance Bill says: “The exemptions… have outlived their utility in the era of simplification of tax laws and where exemptions and tax incentives are being phased out as a matter of stated policy of the government. Further, if under a tax treaty, India gets a right to tax a particular income and the other country is expected to then relieve double taxation by exemption or credit method, providing exemption by India amounts to surrender of the right of taxation by India in favour of the other country.”

In his letter to Sitharaman, the Japanese Ambassador wrote: “I am deeply concerned with this situation given that it will significantly raise the risk of negatively impacting the MAHSR.”

Japan is seeking from Sitharaman an “assurance of prepayment” to the consultancy firms of the Income Tax and associated charges “as early as possible”. “We have to recognize that these costs cannot be borne by JICA’s grant aid,” Satoshi has said.

The Japan Embassy did not respond to calls and an email seeking their comments. Officials in the know in the Indian Railways told The Sunday Express on the condition of anonymity that efforts are underway to see how best this matter can be addressed, and that deliberations were on.

“It is not about the amount of money involved, but the principle they (Japan) are advocating is that their consultants should not have to pay Income Tax for providing a consultancy service, which we are getting for free for our own project,” said a senior official.

The Japanese side has also communicated to the government that the option of “reimbursement” would not be feasible as the consultancy companies in question are small in size and do not have such a pool of funds to bear the expense.

Among the other projects under JICA grant that may be affected, as per the Japanese side, are ones for power supply improvement in Andaman and Nicobar Islands, a strategically important project for both countries; and an Advanced Traffic Information and Management System in Bengaluru. For these two projects, Japan has agreed to the principle of reimbursement, but it has said it is not acceptable for MAHSR as it is a huge project.

The bullet train project is already progressing at a slow pace due to land acquisition issues in Maharashtra. Recently, a much-awaited tender for construction of an undersea tunnel had to be scrapped because of unavailability of land for the tunnel-boring machines to enter.
Officials are now concentrating on the Gujarat portion of the corridor, where work has started in earnest. Sources said it would be at least 2027 before the commercial service rolls out in the state.

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Divyansh Singh

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