The Finance Ministry may not allow state-owned companies to float tax-free bonds in the forthcoming Budget as they have not been utilising the funds raised through these instruments for infrastructure development.
Although the primary objective of tax-free bonds is to encourage state-owned companies to invest in long-term infrastructure projects, they are mostly parking the funds in debt instruments to earn interest income.
"Instead of directing the funds raised from tax free bonds towards infrastructure development, public sector companies issuing these bonds park the money into fixed deposits and earn interest," a senior Finance Ministry official told PTI.
The existing practice of parking the funds in debt instruments defeats the purpose of according tax benefit to bonds, the official said, adding that the Ministry may not allow PSUs to raise funds from such issuances.
The Finance Ministry, sources said, has already raised the issue with the heads of PSUs which were granted permission to float such instruments.
Besides, the Central Board of Direct Taxes (CBDT) too has opposed these bonds as they result in revenue loss.
The government had in 2012-13 allowed state-owned financial institutions to raise about Rs 60,000 crore from tax-free bonds, as compared to Rs 30,000 crore in the previous fiscal.
This included Rs 10,000 crore for NHAI; Rs 10,000 crore for IRFC; Rs 10,000 crore for IIFCL; Rs 5,000 crore for Hudco; Rs 5,000 crore for National Housing Bank; Rs 5,000 crore for Sidbi; Rs 5,000 crore for ports and Rs 10,000 crore for power sector. Sidbi's name was later removed from the list.