The offshore Rupee denominated bonds, generally known as the masala bonds, got a tax benefit when the government during the Budget 2017 exempted them from the taxation for transfer between the non-residents, while a reduced rate of 5% would apply for the investors till the year 2020. This concessional withholding rate of 5% is being charged on the interest which is earned by the foreign entities in bonds or external commercial borrowings and government securities.
Rupee Denominated Bonds exempted from Income Tax effective 1April2016 for transfer among Non Residents
The decision for levying a lower tax deducted at source of 5 % on masala bonds will be effective retrospectively from April 1, 2016. Announcing the Union Budget for 2017-18, the finance minister Mr. Arun Jaitley suggested the extension of the concessional withholding rate of 5% to masala bonds.
Exemption from Tax to Rupee denominated Bonds would mae Raising funds outside India easier
For providing relief to the non-resident investor and in the wake of permission to Indian corporates by the RBI for issuing rupee-denominated bonds outside India, section 48 of the Finance Act, 2016, was amended inter-alia, with effect from the 1st April 2017. It was done a measure for enabling the Indian corporates for raising funds from outside India.
Further, this move also enabled that the gains which arise on account of the rise of rupee against any foreign currency during redemption of the rupee-denominated bond of the Indian company which is subscribed by him, should be ignored while computing the full value of consideration.
Representations have beenreceived throughout for allowing the exemption from capital gain which arises to the secondary holders also. Further, there has been representation for allowing an exemption for transfer of Rupee-Denominated Bonds from the non-resident to the non-resident for increasing the transferability and acceptability of these instrument in the foreign market.
Relief to be provided due to appreciation in value of rupee
It is also proposed for amending the section 48 of the Act providing that the appreciation of rupee should be ignored for computing the full value of consideration. It is regarding providing relief for gains which arises due to the appreciation of rupee against any foreign currency during the redemption of the rupee-denominated bonds of the Indian company to the secondary holders.
Furthermore, for facilitating the transfer of Rupee-Denominated Bonds from a non-resident to a non-resident, it is suggested for amending section 47 of the Act to provide that transfer of capital asset that being rupee-denominated bond of an Indian company which is issued outside the country, by a non- resident to other non- resident would not be considered as a transfer.
These amendments would take effect on 1st April 2018 and would, consequently, apply for the AY 2018-19 and the subsequent years.