Government of India notifies maximum rate of interest on rupee denominated bonds for concessional rate of tax to FIIs/QFIs

 

Finance Act, 2013 inserted a new provision in the Indian Tax Laws, with effect from 1 June 2013, to provide that the tax rate on interest payable to Foreign Institutional Investors (FIIs) or Qualified Foreign Investors (QFIs) on rupee denominated bonds of an Indian company or Government security will be 5% (plus applicable surcharge and cess) on gross basis. The concessional rate applies to interest which is payable between 1 June 2013 and 31 May 2015.

However, concessional tax rate of 5% on rupee denominated bonds of an Indian company is subject to the condition that the rate of interest on such bonds does not exceed the rate as may be notified by the Government of India (GOI) in this behalf.

This Tax Alert explains Notification No. 56/2013/F.No.149/81/2013-TPL dated 29 July 2013 (Notification) issued by the GOI prescribing the maximum rates of interest on rupee denominated bonds of an Indian company to qualify for concessional tax rate of 5%, which are as follows:

• If the bonds are issued prior to 1 July 2010, the maximum rate is 500 basis points (5%) over State Bank of India (SBI) Base Rate as on 1 July 2010.
• If the bonds are issued on or after 1 July 2010, the maximum rate is 500 basis points (5%) over SBI Base Rate as on date of issue of bonds.

Lowering of tax rate on interest payment to FIIs and QFIs on rupee denominated bonds is one of the measures implemented by the GOI to encourage greater offshore investment in the debt market in continuation of similar measures adopted in the past in respect of infrastructure debt funds and borrowings in foreign currency by Indian companies. The concessional rate of 5% is lower than rates as per most DTAAs signed by India, which makes India an attractive destination for debt investment from any country.

FIIs and QFIs would generally have a Permanent Account Number in India and, hence, punitive rate of withholding at 20% would not be applicable. FIIs and QFIs are also required to comply with regulatory norms prescribed by SEBI and Reserve Bank of India.

The benchmark of 500 basis points over SBI Base Rate is a fairly reasonable margin which is likely to cover most bonds issued by Indian companies under the concessional tax rate.

The benefit on concessional rate is available to primary subscriptions, as also in respect of existing bonds/securities, so long as interest is payable during the specified limited window period between 1 June 2013 and 31 May 2015, unless subsequently extended by the legislature.