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To ensure that foreign investors continue to invest in external commercial borrowings, bonds, including rupee denominated (masala) bonds and government securities, the Budget has proposed to extend the concessional withholding rate of 5 per cent for three more years up to June 30, 2020.
The Budget also proposed to exempt capital gains arising out of transfer of a rupee denominated bond by a non-resident to a non-resident.
The twin moves have to be seen in the context of the US interest rates nudging up and FIIs preferring investment in safe haven currencies.
“FIIs concern on taxation arising from indirect transfer of shares has been addressed. Extension of concessional withholding tax of 5 per cent on ECB and Masala Bonds can turn around debt FII flows,” said Nilesh Shah, Managing Director, Kotak Mahindra Asset Management Company.
According to the Budget, with a view to facilitate transfer of Rupee Denominated Bonds from non-resident to non-resident, it is proposed to amend Section 47 so as to provide that any transfer of capital asset, being rupee denominated bond of Indian company issued outside India, by a non-resident to another non-resident will not be regarded as transfer.
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