Domestic companies waiting to tap the offshore market for funding by issuing rupee bonds would now find it easier as the government has clarified that foreign portfolio investors will have to pay only 5% withholding tax on their investments in offshore Indian rupee bonds.
Further, the government also said that possible capital gains arising out of movement in exchange rate would be exempt from tax.
For instance, an FPI standing to gain simply from the appreciation of the rupee against the dollar will not have to bear a tax burden on such a profit.
“In so far as taxation of interest income from these INR off-shore bonds in the case of non-resident investors is concerned, it is clarified that withholding tax at the rate of 5%, which is in the nature of final tax, would be applicable in the same way as it is applicable for off-shore dollar denominated bonds,” the Central Board of Direct Tax said in a release.
However, the legislative amendment to enable these tax breaks will be proposed only next year through the Finance Bill, 2016.
“The market has been waiting for this clarity and now that it has come, we will see greater interest. Although the legislative amendments will remain, the notification is enough to elicit interest from foreign investors,” said Ajay Manglunia, executive vice-president of fixed income at Edelweiss Securities.
Following the Reserve Bank of India’s move to allow Indian companies to issue rupee bonds in the offshore market in September, many domestic firms have been eying to raise funds through such offshore issuance.
HDFC, the largest home loan lender has already got an in-principle board approval to raise funds through offshore rupee bond issuance. This move will attract FPIs to such bond issuance given the tax liability is reduced and thereby returns are higher.
As per the RBI guidelines, a company can raise up to $750 million per year under the automatic route through rupee denominated bonds, popularly known as masala bonds.