The revamped depository receipts scheme allowing new asset classes and unlisted companies to raise money abroad may get a tepid response even after its notification soon, as the tax department has refused to make changes to the law recognising the new aspects of the scheme.
As per the Income Tax Act, 1961, global depository receipts (GDRs) are instruments created outside India and issued to non-resident investors against the issue of ordinary shares.
In the new regime, the depository receipts - foreign currency-denominated trading instruments - can also be issued against debt and mutual fund units and by unlisted companies. The issue could be sponsored as well as unsponsored. These new entities and instruments are not recognsised by the Income Tax Act.
"The liberalised scheme will be notified soon but in the absence of tax clarity it may not take off fully. As a provision was not made in the Finance Bill in accordance with the proposed changes, some companies will suffer and won't be able to raise money abroad," said a finance ministry official, asking not to be named.
The Department of Economic Affairs, which proposed the liberalised regime based on the Sahoo committee's recommendations, was hopeful of a resolution in the next Budget, but the tax department officials said it would not be possible because the scheme is inconsistent with the Income Tax Act.
"The current law allows GDRs only against ordinary shares. So other instruments will be taxed at the maximum marginal rate of 40 per cent. In the case of debt instruments, it is always interest income and there can't be zero capital gains tax on that," said a tax department official, on the condition of anonymity.
Experts said people may wait for tax clarity as far as mutual funds are concerned.
"Mutual funds are not specifically covered in the current tax regime, and so people may wait and watch till there is tax clarity," said Nitesh Mehta, executive director, Walker Chandiok & Co.
The official added as there is no mention of unlisted companies and unsponsored debt in the current law it will remain a grey area and assessing officers may raise a demand.
Under the current regime, domestic issuers are not permitted to issue unsponsored DRs. But in the proposed regime, companies will be allowed to issue both sponsored and unsponsored DRs. They will also be allowed to issue DRs for non-capital raising purposes such as improving liquidity, valuation or creating brand visibility in international markets.
"We did not give tax benefit to GDR/ADR because if a company changes hands outside we would not get to know. It will be an indirect transfer. We would not even know about the transaction if it is unsponsored or unlisted," added another official.
However, Mehta said there might not be a problem for unsponsored debt and unlisted companies as the current law doesn't distinguish between unsponsored and sponsored debt and listed and unlisted entities.
The M S Sahoo panel, on whose recommendations the finance ministry is revamping DRs, had said the conversion of a DR into the underlying securities and vice-versa should not be taxable events. It said the trading of DRs outside India should not attract any tax in India.
Finance Minister Arun Jaitley, in his Budget speech, had announced that the government would liberalise ADR/GDR regime to allow issuance of DRs on all permissible securities.
The finance ministry is also planning to notify new Indian Depository Receipts (IDRs) regime, which will be a mirror image of ADRs or GDRs. IDRs are derivative instruments with underlying assets denominated in rupees for foreign companies to raise money in India.
Due to lack of clarity on taxation, IDRs have not picked up since their launch in 2000. Standard Chartered PLC was the first and only foreign entity to tap this route for fund raising in 2010.