Govt Reviewing Tax Status Of Bonds

The government is reviewing the scope of tax benefits on interest income accruing to project financiers from infrastructure bonds issued under Section 10 (23G) of the Income Tax Act, a top finance ministry official said. It has initiated a dialogue with bankers in this regard.

The government did not specify whether interest income meant gross interest income or net interest income.

The official said, "Under Section 10 (23G), certain incentives were introduced on the interest paid for infrastructure projects. The beneficiaries were the lenders to these projects. There is confusion whether the tax benefit is on the net interest income or the gross interest income."

Prior to the introduction of this Section, FIs and banks extended funds to such projects at 18 per cent and paid about 7.75 per cent as corporate tax. However, after the introduction of this Section, which exempts them from paying corporate tax, they started passing on this advantage to the borrower.

The exemption amount is significant if gross interest income is taken into account. For instance, if the debt paper is priced at 16 per cent, financiers would get a 40 per cent exemption. The effective rate would then work out to 11.2 per cent. However, the exemption would be substantially lower if it were on the net interest income.

Several infrastructure projects took recourse to the instrument as the cost of funds to prime borrowers was estimated to be around 10-11 per cent.

Sources said a significant portion of about Rs 14,000 crore sanctioned by IDBI and ICICI to infrastructure projects is through bonds carrying Section 10 (23G) benefits.

Reliance Telecom had, for instance, placed Rs 600 crore worth of bonds with IDBI at 10.5 per cent. IDBI also raised about Rs 120 crore for Tata Teleservices, and teamed up with State Bank of India to raise Rs 230 crore.

The financiers have done the deals presuming that the tax exemption is on the gross interest income. But they have also entered into an understanding with the borrower that the latter would bear the additional cost if the exemption is on the net interest income.