Bondholders may be saved from a taxing tool in the Budget. The finance ministry is considering a proposal to keep bonds, both government and corporate, out of tax deducted at source (TDS) net. The move is considered crucial for deepening of the debt market.
If the proposal is accepted, an announcement would be made in Budget 2008. The proposed move is on the lines of recommendations made by high-level committees including the RH Patil Committee on creating a market for corporate bonds and Deepak Parekh committee on infrastructure financing.
In Budget 2006, finance minister P Chidambaram, in his speech, had announced that the government had accepted the recommendations of the report of the High-Level Expert Committee on Corporate Bonds & Securitisation and steps would be taken to create a single, unified exchange-traded market for corporate bonds.
The government had brought RBI bonds under the ambit of TDS in Budget 2007. Even as the step placed government and corporate bonds on a par, the TDS itself was considered a major hindrance in the way of an active bond market. Institutional investors like insurance companies and mutual funds are, however, exempt from TDS, putting other investors on an unequal ground.
The department of economic affairs (DEA) has been in favour of doing away with the TDS. It believes the deepening of the bond market is crucial for the infrastructure sector. The revenue department has been resisting such a move as TDS helps in establishing audit trail. However, supporters of the proposal argue that investments over Rs 5 lakh in bonds get reported in the annual information return (AIR) and the government may lower the limit of reporting under AIR to keep the trail.
Globally, the debt market is thrice the size of equity market. However, in India, the market has remained largely inactive even after the NSE and BSE trading platforms became operational in July 2007.