Indian court ruling likely to hamper PPP highway project bids

Concessionaires in India are concerned that a court ruling last week to tax financial bids for tolled highway contracts will disrupt their project proposals for upcoming tenders, two sources familiar told Infralogic.

An association of road builders and concessionaires is now seeking the National Highways Authority of India’s (NHAI) intervention to appeal to the Ministry of Finance, seeking a clarification on the matter, the sources said.

The core issue under dispute is the Rajasthan High Court’s 22 May ruling that IRB Infrastructure Developers – the builder and concessionaire of the 125km CG Tollway – is liable to pay tax on the rights awarded to it to collect toll for 21 years.

IRB Infrastructure Developers won the tender for the INR 20.9bn PPP in 2016, entering into a 20-year contract ending in November 2037.

In a letter dated 28 May to the NHAI, a copy of which Infralogic has seen, the National Highways Builders Federation (NHBF) points out that the Rajasthan High Court ruling is at variance with Gujarat and Karnataka states, which have dropped their demands in the past for tax on concessions awarded.

“Concessionaires therefore face materially divergent outcomes depending solely on the assessing jurisdiction,” the letter states.

An unresolved tax matter introduces a significant, uncertain cost into bidders’ financial models and prudent bidders will either price in the worst-case tax scenario – resulting in inflating the grant payable by the NHAI – or hold back from bidding altogether, the NHBF said.

“Either outcome risks weaker competitive tension, higher project cost and delayed award. Timely certainty before bid submission is therefore in the authority’s direct commercial interest,” it said.

The letter is copied to the ministers of finance, and road transport, as well as to secretaries in both ministries and to the chairman of the central board of indirect taxes and customs.

CG Tollway, in its writ petition, stated that the legitimate dues were already paid at the time of construction. Demanding a tax on the same stretch of road, separately for the right to collect toll, effectively amounts to double taxation, it said.

The ruling “marks a pivotal moment for the infrastructure sector” as it expands the ambit of the goods and services tax into the complex world of BOT concession arrangements, Ajinkya Gunjan Mishra, a partner at law firm S&R Associates, told Infralogic.

“By treating toll collection rights as consideration for construction services, the judgment dissolves the once-clear line between exempt toll operations and taxable works contracts. In doing so, it leaves behind difficult questions of double taxation, commercial reality, and the fragile certainty upon which long-term infrastructure projects are built,” Mishra added.

Historical issue

In 2023, the NHAI sided with investors when tax authorities levied 18% on upfront payments by them in exchange for long-term concessions, Infralogic reported at the time.

Tax officials had visited concessionaires’ offices, including Macquarie, and Cube Highways and Infrastructure, questioning officials for hours.

The NHAI wrote to the finance ministry then, stating that since toll receipts are exempt from tax, it follows logically that a concession fee – which is calculated based on toll revenue – should also be exempt.

The tax demand then led to the NHAI extending bid deadlines for two highway concessions. This time round, there are three concessions for which bids are due on 12 June. If there is no clarity on the situation, the dates to submit proposals will most likely be extended, the sources said.

Government liability

Should the Rajasthan High Court’s ruling on CG Tollway lead to widespread demands, the NHAI may find itself exposed to substantial reimbursement claims from project companies across its PPP portfolio, the NHBF’s letter states.

“In effect, tax collected by State GST departments could ultimately be funded by the authority – a transfer between public entities that yields no net revenue to the exchequer while creating real liability, disputes and administrative burden for NHAI,” the NHBF said.

PPP pipeline

The NHAI has a sizeable pipeline of more than USD 25bn of greenfield build, operate, transfer (BOT) projects that it intends to bid out, as well as concessions for operational assets, in the toll, operate, transfer (TOT) method.

The TOT model has proved successful with foreign investors, including Macquarie, La Caisse, Cube Highways and Infrastructure, and KKR all winning concessions in the last eight years. The TOT model alone has raised more than USD 6bn for the Indian government since 2018, according to public data.