Uti Seeks Cut In Withholding Tax To 10 Per Cent

The Unit Trust of India (UTI) has sought a cut in current withholding tax for its India Debt Fund Scheme 1997, from 15 per cent to 10 per cent. The country's first-ever offshore debt fund is pegged at $150 million and will be launched on June 15.

If the Union finance ministry agrees to the request, the reduced tax structure will be applicable when India Debt Fund Ltd, UTIs Mauritius-based subsidiary company, encashes part of its dividend entitlement.

This way, the fund could pass on the advantage of a reduced withholding tax to its foreign shareholders, UTI sources explained.

Under normal circumstances, however, dividends will be declared annually and automatically reinvested in further units by the India Debt Fund. This will be linked to the net asset value of the fund.

 

Each unit of the scheme has been priced at $10, and the minimum subscription by an investor will be $100,000, with increments of $10,000 thereafter. A senior UTI official commented that the scheme will be a more tax efficient instrument. The foreign institutions will not be liable to pay any taxes since there will be a redemption of capital and not a dividend pay-out, officials explained.

The scheme was initially scheduled to be launched in May-end. Explaining the reasons behind the delay, senior UTI officials said some taxation issues needed to be looked into before the scheme was launched. Roadshows for the scheme are already on and the book-building process has been initiated, officials said.

The UTI top brass is already in London, they added.

UTI has tied up with Nomura International of London to market this fund to institutional investors in Europe, USA and markets in South-east Asia.

The UTI chairman G P Gupta said the Trust expects high demand in this fund from foreign investors. The stable rupee, current high interest rates, and capital appreciation arising out of decline in interest rates are some of the key attractions of the fund", he said. The offshore fund to be based in Mauritius has been designed as a close-ended scheme with an innovation. "The fund will be close-ended for the first three years and then will be turned into an open-ended fund", disclosed another senior UTI official.

Explaining the rationale behind initially keeping the scheme as a close-ended scheme, he explained that Indian debt has a relatively long lock-in period and that there is very little depth in the secondary debt market.

The fund will be listed in the London Stock Exchange and investors willing to exit from the scheme can do so at the quoted price at the bourse.