FPIs trading in rupee bonds face anomaly in tax concessions at GIFT City

Topics GIFT City | FPIs | rupee bond

An anomaly has been detected in tax concessions given to foreign investors that trade in rupee bonds on exchanges in the International Financial Services Centre (IFSC) at Gujarat International Fin-Tec City (GIFT City). 

In a bid to boost listing bonds at the IFSC, the Union Budget provided a reduction in withholding tax for investment in rupee-denominated bonds to 4 per cent from 5 per cent earlier. However, the overall tax rate for these investors has been kept unchanged at 5 per cent. 

This means overseas investors will have to file returns and pay the additional 1 per cent tax to comply with Indian tax laws. This would entail increase in the compliance burden and added scrutiny because investors will have to furnish transaction details, the tax identification number, and other items. 

Had the tax liability been equal to the withholding tax, the investors would have been exempt from filing returns — as is the case with foreign investors that pay a withholding tax of 5 per cent on interest they earn on rupee-denominated bonds issued by Indian firms and government securities within India.

“Foreign investors investing in debt instruments listed on the IFSC exchanges will suffer a lower withholding tax of 4 per cent. The section levying tax on this income, however, still has a rate of 5 per cent. This will lead to additional compliance requirements in terms of tax payments and filing of returns by investors,” said Anish Thacker, partner, EY India, adding that the anomaly appeared to be unintentional but had to be corrected.

The concessional tax rates for trading in the IFSC will take effect from April 1 this year and are valid till June 30, 2023. A withholding tax is akin to tax deducted as source wherein the payer is liable to deduct the tax before paying.

“There is a complete mismatch between what the government intends to do and what it is doing. The IFSC is an offshore jurisdiction that has been promoted as a light-touch regulatory and tax compliance zone. The requirement to file returns will defeat the purpose of coming through the IFSC,” said a person, on anonymity. 

Rajesh Gandhi, partner at Deloitte India, believes the concessional rate might encourage companies to list their bonds on the GIFT exchange, especially as the borrower entity could continue to be incorporated outside GIFT city. He feels the government could have considered a full tax exemption, at least in the initial years, instead of a partial tax concession to boost listings at GIFT. “The higher tax rate is an anomaly and hopefully will get rectified soon,” he said.  Besides the concessional rate for debt investors, this year’s Budget also proposed an international bullion exchange at the financial hub. This will provide an additional trade option for global market participants, and may be used to import gold, besides developing vault companies and warehousing.

The Centre has been doling out several concessions for IFSC investors over the past few years. This includes exemption from paying securities transaction tax, commodities transaction tax, and stamp duty as well as exempting transactions in derivatives, bonds, global depository receipts and rupee bonds on an IFSC exchange from capital gains tax.

Under the net

• Withholding tax for investment in rupee-denominated bonds reduced to 4% 
• However, overall tax rates for foreign investors kept unchanged at 5%
• The concessional tax regime for such bonds in India does not have separate tax rates
• Investors will be required to file returns, pay additional 1% tax 
• Have to furnish transaction details, tax identification number, and similar details 
• Industry had lobbied for a full tax exemption on interest from such bonds

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