Foreign portfolio investors (FPIs) on Tuesday urged the finance ministry to clarify on the tax treatment of investments in rupee-denominated bonds issued overseas, the guidelines for which were issued by the Reserve Bank of India (RBI) in September. The government is yet to take a view on how the income generated from these bonds would be taxed.
With taxation issues topping the agenda in their meeting with finance ministry officials, the FPIs also asked the government to make the concessional 5% withholding tax on domestic corporate bonds a long-term one. The concessional rate, which was due to expire in June 2015, was extended by two years.
The meeting with the FPIs was organised by the department of economic affairs to take feedback on various issues for further improving ease of doing business.
On September 29, the central bank issued guidelines for issuance of rupee-denominated bonds overseas by Indian corporates for most purposes barring a few. The move would help corporates in shifting the currency risk associated with foreign borrowings to foreign investors. “There is a lot of interest in the market for such bonds but I think people are going to wait for tax clarity,” said Neeraj Gambhir, managing director and head, fixed income, India, Nomura Fixed Income Securities Pvt Ltd. FPIs’ net investments in Indian equities stood at R1.1 lakh crore and in bonds at R1.66 lakh crore in FY15. However, due to global uncertainties, their investments so far this year has been around R12,290 crore in bonds while there has been a net outflow of R10,524 crore from equities. “A number of suggestions (including on tax issues) have come and they have to be looked into,” economic affairs secretary Shaktikanta Das said after the meeting.
Das said the Indian economy with an expected growth rate of above 7.5% in FY16 would be among the best performing economies in the world and that the government would continue to take more reform measures to sustain the growth rate. The global rating agency Standard and Poor’s on Monday retained the lowest investment grade rating for India (‘BBB-‘) citing low per capita income level and poor fiscal health of the country.
There were also discussions about registration of FPIs, said Kakhu Nakhate, president and country head – India, Bank of America Merrill Lynch.
“There were discussions about how it is important to have certainty about taxation framework and government has been trying to be assertive about the fact that they want to maintain certainty around tax framework as far as foreign investors are concerned and they continue to remain committed on that”, said Vineet Bhatnagar, president and head, Phillip Capital in India.
The government recently exempted FPIs from MAT (levied at18.5% on book profits) for the period prior to April 1, 2015, accepting the recommendation of an expert panel. In the Budget in February, it had exempted these investors from the purview of MAT prospectively.