Income tax hurdle now stands in the way of high-speed train project
Riddled with ongoing delays, the prestigious high-speed rail project faces 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 train project at Mumbai Ahmedabad High Speed (MAHSR) is not addressed.
Japan’s Ambassador to India, Suzuki Satoshi, has written to Finance Minister Nirmala Sitharaman asking him to resolve this impasse and expressed concern that if not resolved, the issue will have ” a negative impact” on all projects approved under Japanese grants, except for further delays in the high-speed train project.
The consultants for whom the Japanese want an exemption are employed by Japan International Consultants and JE, the two Japanese companies engaged in the design aspects of the project and benefiting from a grant from the Japan International Cooperation Agency (JICA). This is not part of the loan that Japan gave India for the project. JICA is the investment agency of the Japanese government.
The heart of Japan’s argument is that its consultants should not have to pay taxes on the income they receive and the additional expenses they incur to perform work that Japan provides under a grant for an Indian project.
Japan is particularly concerned about clauses 8, 8A, 8B and 9 of article 10 of the Income Tax Law of the draft budget law, which deal with the exemption from income tax. . These clauses speak of foreign nationals, among others, engaged in technical assistance to government projects and receiving salaries in India.
In the 2022 finance bill, adopted during the recent budget session of Parliament, these exemptions have been removed, making consultants liable for tax from this financial year. The memorandum explaining the provisions of the finance bill states: “Exemptions…have lost their usefulness in an era of simplification of tax laws and where exemptions and tax incentives are being phased out as part of the stated policy of the government. Further, if under a tax treaty India obtains the right to tax a particular income and the other country is supposed to alleviate double taxation by an exemption or credit method, the exemption by India is tantamount to the waiver of the right to tax by India in favor of the other country”.
In his letter to Sitharaman, the Japanese Ambassador wrote, “I am deeply concerned about this situation as it will greatly increase the risk of negatively impacting MAHSR.”
Japan is asking Sitharaman for “prepayment insurance” from consulting firms of income tax and related charges “as soon as possible.” “We must recognize that these costs cannot be supported by JICA grants,” Satoshi said.
The Japanese Embassy did not respond to calls or emails seeking comment. Officials familiar with Indian Railways told The Sunday Express on condition of anonymity that efforts are underway to see how best to resolve this issue and that deliberations are ongoing.
“It’s 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 to provide a consulting service, that we get for free for our own project,” a senior official said.
The Japanese side also informed the government that the “reimbursement” option would not be feasible because the consulting companies in question are small in size and do not have such a pool of funds to support the expenses.
Other JICA-funded projects that may be affected, according to the Japanese side, include those for improving power supply in the Andaman and Nicobar Islands, a strategically important project for the two countries; and an advanced traffic information and management system in Bangalore. For these two projects, Japan accepted the principle of reimbursement, but said that it was not acceptable to MAHSR because it was a huge project.
The high-speed rail project is already progressing at a slow pace due to land acquisition issues in Maharashtra. Recently, a long-awaited tender for the construction of an undersea tunnel had to be abandoned due to the unavailability of land for the entrance of the tunnel boring machines.
Officials are now focusing on the Gujarat part of the corridor, where work has started in earnest. Sources said it would take at least 2027 before the commercial service rolls out in the state.