Mr. Vijay Kalantri, President, AIAI

Exemption of Service Tax for Capital Intensive Infrastructure Projects such as Ports.
Airports, Seaports and Highways provide the gateway and vital links to international business and this is a fundamental requirement for any successful globalization strategy. Just as the Special Economic Zones are instrumental in promoting exports and enable hassle free trading activity, so also are the Airports, Seaports and Highways responsible for smoother and timely movement of cargo. Hence, the Seaports and Airports should also be attributed the same benefits as the SEZs as without them, mass trade facilitation is not possible. We feel that incentives should be given to such sectors as we lack efficiency in these sectors and service tax definitely acts as a disincentive.

In this context we would like to bring to your kind attention that in 2005 – 2006 Budget the seaports have been brought under the purview of Service Tax. The service tax levied on seaports would mean a burden on the economic viability of the project as it would increase the cost factors of the services rendered as also to the project development cost. We therefore request the Government to exempt seaports from the purview of Service Tax.

Further, the Service Tax introduced in this Budget on Dredging would have an adverse impact on port development. Dredging is a continuous process in ports in order to create & maintain adequate draughts. None of our ports can cater to the latest 3rd generation vessels due to lack of adequate draught, hence Dredging is an integral and critical activity for transforming our ports and making them international hubs that require minimum 16 mtrs. draught.

The capital cost of dredging constitutes nearly 30% - 40% of the overall project outlay, levying of Service Tax would increase the cost of such projects upfront to the tune of nearly 5%-7% which is a phenomenal increase considering infrastructure projects have long gestation projects.

Further annual maintenance on dredging is a recurring cost every year and constitutes nearly 10%-15% of the operating cost in a port due to constant siltation and demands huge capital outlay in the range of more than Rs.100 crores. This regular burden on the project is itself a deterrent to the investors and the Service Tax will further aggravate the problem.

Investment in infrastructure projects such as ports has always been slow and painstaking and the levy of Service Tax on such projects at such high rates will further dampen the development of the ports sectors.

Further most of our ports are stretched beyond capacity and are working well below world standards. Keeping in mind the growth of trade which is expected to be to be approximately in the range of 16% - 18% and considering the GDP growth projected at 8%, we need to develop quickly many more ports to facilitate this growth in trade.

In view of the above there should be more incentives advanced to this sector rather than burdening it with more taxes.

The Finance Minister has also spoken about initiating 20 ports in the next 5 years but the Service tax factor would be detrimental to the development of these projects as Dredging & Construction are a continuous process. Further, private promoters new Ports that are being developed in the domain of Public Private Partnership will be discouraged from investing in this sector.

In above background, we request the Government to exempt the Capital Intensive Infrastructure Projects such as Ports from the purview of Service Tax.
With regards,
Yours sincerely,
Vijay Kalantri
President