Budget impact: Tax concession to boost masala bond market

Rupee-denominated offshore bonds ('masala bonds'), are to get a boost, with the Union Budget proposing to extend the concessional withholding tax rate of five per cent by three years to July 2020. And, exempting taxation on transfer of such bonds for non-residents.

In line with an earlier announcement, the Finance Bill proposed to extend the concessional withholding tax rate of five per cent as currently applicable to foreign currency bonds and external commercial borrowings to masala bonds issued before July 1, 2020.

Further, offshore transfer of masala bonds, issued abroad, from one non-resident to another would not be regarded as a taxable transfer and thus would not attract tax in India.

"These proposals were long awaited and shall provide the necessary fillip to investments in masala bonds as a mode of raising capital. With the concessional withholding tax rate being extended, these bonds would be placed on the same footing as other modes of foreign currency fund-raising, whether denominated in rupees or foreign currency," stated legal firm Khaitan & Co.

In September 2015, the Reserve Bank (RBI) had permitted Indian companies to issue masala bonds, as a measure to enable them to raise funds from outside India. However, these are yet to meaningfully take off. Non-banking finance entity Shriram Transport recently raised Rs 475 crore by selling these to foreign investors. HDFC has reportedly raised a little more than Rs 5,000 crore through these.

These bonds are listed on markets outside India such as the London and Singapore stock exchanges. The former has reportedly seen masala bond issuance to the tune of about $1.2 billion.

In November last year, RBI had said Indian banks could raise tier-I and tier-II funds for lending to the infrastructure sector by issuing masala bonds within the Rs 2.44 lakh crore foreign investment ceiling for corporate bonds.