During the operation phase of an infrastructure project, the project will have both cash outflows and inflows. The project cash outflows relate to the expenditure incurred toward the operation and maintenance of the project. While, the revenues generated by the project from selling the services to the users/public authority is the cash inflows component of the project cash flows during operation phase. The difference between these cash flows is the pre-tax cash flow during operation phase of the project. While the after-tax cash flow during operation phase will the difference between the net pre-tax cash flow and tax liability.

Depreciation is a non-cash item which has an indirect effect on the taxation. Depreciation represents wear and tear of the project asset during the utilisation of it for provision of services. This amount is allowed to be treated as an expense against the revenue. Therefore, the tax liability of the project is calculated as follows:

Tax liability = τ (R_o− E_o− D)

Where, R_o= Revenue during operation phase

E_o= Expenses during operation phase

D = Depreciation

The after tax cash flow during the operation phase is as follows:

After-tax cash flow = R − E − τ(R− E− D)

This can be re-arranged as follows:

After-tax cash flow = (1− τ)(R− E) + τD

Therefore, the after tax cash flow during the operation phase is represented by after-tax revenue minus expenses plus the tax shield from depreciation expense.