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Reconcile tax anomalies to boost the debt market
June, 23rd 2014

The Narendra Modi-led Government should come up with a detailed medium-to-long term policy to remove “tax anomalies” that hinder the growth of the Indian debt markets, said SEBI Chairman, U K Sinha.

Tax treatment of the various debt-raising routes available to an Indian corporate are vastly different, Sinha said, adding that the Government must try and reconcile them at the earliest.

“If you are looking for long-term money and big money, especially for infrastructure companies, as long as these anomalies exist, people will be hesitant to invest,” he said at the Skoch summit in New Delhi. Sinha pointed out the existence of anomalies on withholding tax on foreign institutional investors (FII) investments in infrastructure bonds floated by Indian entities. As part of its efforts to prop up investor interest in debt markets, the Finance Ministry is already working on plans to bring uniformity in withholding tax.

At present, Indian companies raising external commercial borrowings, are required to withhold tax at 5 per cent on the interest paid to a foreign lender.

In the case of infrastructure and non-infrastructure bonds, the withholding tax is 5 per cent and 20 per cent, respectively.

The upcoming Budget could see a step towards having a uniform withholding tax on all debt market issuances of Indian entities. This could buoy sentiment in the Indian debt markets and increase flow of foreign funds into this market, say experts.

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