To provide a boost to the fledgling corporate bond market in the country, the Centre has paved the way for foreign institutional investors to avail of a concessional tax rate of 5 per cent on their investments in rupee-denominated bonds of Indian companies.
This has been done by specifying the maximum rate of interest rate that could be offered on such bonds.
Budget 2013-14 had stipulated that concessional tax rate of 5 per cent will be available to FIIs / qualified foreign investors (QFIs) so long as the interest rates offered on the bonds is within a specified limit.
The Centre has now specified the maximum rate of interest that could be offered on rupee-denominated bonds issued by corporates.
For corporate bonds issued prior to July 1, 2010, the maximum rate can be 500 basis points above the SBI’s base rate as on July 1, 2010.
In the case of corporate bonds issued on or after July 1, 2010, the maximum rate has been pegged at 500 bps above the SBI’s base rate as on the date of issue.
Based on historical base rates published by State Bank of India on its Web site, the applicable maximum rates of interest for rupee-denominated bonds issued in the past varies from 12.50 per cent to 15 per cent a year.
“This move is a very positive step. People were not expecting the tax authorities to be so liberal (in terms of large mark up over the base rate). It is certainly going to enthuse FIIs to invest more in corporate bonds,” Keyur Shah, Tax Partner, E&Y told Business Line .
Over the past few years, India Inc has raised issued huge amounts of money through corporate bonds, as they found these to be a better option than raising funds abroad through external commercial borrowings.
The Centre had over the past few years lowered the tax rate to 5 per cent on select debt instruments with a view to encouraging foreign investment in Indian debt securities.
In 2011, the concessional rate of 5 per cent was introduced for interest payment to non-residents by notified infrastructure debt funds.
In 2012, the concessional rate was extended to borrowings in foreign currency by Indian companies from non-residents under a loan agreement or by issue of long-term infrastructure bonds. In Budget 2013-14, the Centre had provided that the tax rate on interest payable to FIIs or QFIs on rupee-denominated bonds of an Indian company or Government security will be 5 per cent on gross basis.
This concessional rate will be available for interest payable between June 1, 2013 and May 31, 2015, the Government had said.