Foreign debt can be made cheaper for India Inc: RBI
According to the experts, the ability of Indian firms to raise funds will be improved by easing the tax given that funds are expected to flow back to the US as interest rates increase there.
Presently, the interest paid to non-residents on foreign currency borrowings is subject to 5-20% withholding tax, with 10% being the standard rate. Some priority segments such as infrastructure are being charged at a rate of 5%.
There are exemptions provided by the government on money raised through an infrastructure debt fund or loans raised through long-term bonds. A 5% withholding tax is applicable in case of loans approved by the central government and taken between July 2012 and June 2017. There are similar exemptions for rupee-denominated bonds for all borrowings till June 2017. Bilateral ties are also taken into account while deciding the rate of withholding tax.
The government found it necessary to give exemptions for the infrastructure sector considering the funds required for its functioning.
Banks have been lobbying with the government for exempting rupee-denominated offshore bonds, also known as masala bonds, from withholding tax which currently stands at 5%.
HDFC is the only organisation which has issued masala bonds, garnering Rs.5,000 crore in four tranches in 2016 at an interest rate of 8.3% for the first three and 7.25% for the last. The company has received the green signal to raise another Rs.3,000 crore following the same channel.