“We are preparing procedural mechanism for availing of concessional withholding tax for rupee denominated long-term infra bonds. Currently, investment in debt instruments is unviable for FIIs as the tax rates are very high, especially when you include the cost involved in hedging the exchange risk,” the official said.
Simultaneously, the finance ministry along with the RBI and Sebi is also working on bringing in clarity in taxation policy for securitised debt.
The department of economic affairs is working on framework for registering and recognising the trusts constituted as special purpose vehicles as per securitisation guidelines. “The ministry is thinking of granting pass-through status to these trusts under the I-T Act,” the official said.
The banking and capital market regulator are working on preparing guidelines so that the structure of such SPVs could be determined. The guidelines would also throw light on the tax treatment. Both the issues are being examined by the CBDT, the official said.
Debt investments by FIIs are subject to a withholding tax deduction, between 20.6 per cent and 21.012 per cent depending on the nature and net taxable income of the FII.
The steps are likely to help develop a vibrant corporate debt market in the country, the size of which is estimated at 11.8 per cent of GDP, lower than the average for emerging East Asia at 17.2 per cent. For Japan the percentage is even higher at 19.8 per cent.
However, experts say that even after addressing the tax concerns, the government may not be able to get the FIIs invest as much as it wants because of several pending issues including stamp duty and regulatory overlaps.
“FIIs are though aggressive in G-sec, they are not that keen in corporate bond market as it is not liquid. It is a big challenge. For instance there is the issue of stamp duty and several overlaps between Sebi and RBI as regard to who will be the guiding authority. These need to be addressed first,” Jagannadham Thunuguntla, equity head, SMC capital, said.
Higher stamp duty and the existing arbitrage due to inter-state variations increases the cost of issuing such papers.
As such, the finance ministry is working on host of other measures to jump-start activity in the corporate bond market for ultimately benefiting India Inc. Apart from asking banks to cut their exposure to top listed companies by 10 per cent of their current levels, it is also planning to allow full reinvestment of debt papers of FIIs.