Anubhav Jain

Who gave the name Masala Bonds and the reason behind it: International Finance Corporation (IFC) named the rupee denominated borrowings by Indian entities in overseas market as “Masala Bonds”. IFC named them Masala Bonds to give a local flavour.

What is a Masala bond: These are rupee denominated borrowings by Indian entities in overseas markets. Unlike external commercial borrowings (ECB’s), where Indian companies raise money in foreign currency, these are issued to foreign investors and settled in US dollars.

The Reserve Bank of India (‘RBI’) has recently permitted Indian companies to issue rupee denominated bonds overseas (‘RDB’ or ‘offshore RDB’). As per the new regulations issued by the RBI on September 29, 2015, offshore RDBs would be in the form of plain vanilla bonds. Such bonds can be issued by any Indian company, REIT or InvIT to any foreign investor from a Financial Action Task Force (‘FATF’) compliant jurisdiction for a minimum maturity period of 5 years. The maximum amount which can be raised through RDBs under the automatic route is US$ 750 million per annum. 

Taxation of interest income from RDBs to foreign investors: The Ministry of Finance has issued a Press Release dated October 29, 2015 providing for a concessional tax regime on interest and capital gains on offshore RDBs in the hands of foreign investors. Concessional withholding rate of 5% is available under the (Indian) Income-tax Act, 1961 (‘the Act’). This existing concessional regime comes with a sunset clause, so as to be valid upto June 30, 2017 unless extended.

Interpretation of Indo-US DTAA: Interest arising in India and paid to a resident of US may be taxed in the US. However such interest may be taxed in India, if the beneficial owner of the interest is a resident of the US. The tax rate will be 10% of the gross amount of interest if such interest is paid on a loan granted by a bank carrying on a bona fide banking business or by a similar financial institution (including an insurance company); and 15 per cent of the gross amount of the interest in all other cases.

Interpretation of Indo-Canadian DTAA: Interest arising in India and paid to a resident of US may be taxed in the Canada. However, such interest may also be taxed in India, if the recipient is the beneficial owner of the interest, the tax so charged shall not exceed 15 per cent of the gross amount of the interest.

Taxation of capital gains income from RDBs to foreign investors: Any gain arising on the transfer of RDBs by a non-resident will be treated as accrued in India and therefore liable to tax in India.

  • Short Term Capital Gains (held for a period of 36 months or less): Tax Rate @40%.
  • Long Term Capital Gains arising on the transfer of RDBs (held for a period of more than 36 months) Tax Rate @ of 10%.

The above said rates will be applicable when the RDB’s are treated as marketable securities as per the Securities Contract (Regulations) Act, 1956. Where RDB’s are not treated as marketable securities under SCRA, the rate of tax would be 20%.

RDB’s provide a new strategy for Indian companies to generate funds, without taking into account any foreign exchange related risks, and the provision of concessional tax regime is an encouraging step for attracting foreign investors to invest into India.

(Author Anubhav Jain is a Executive- Direct Tax at Sudit K. Parekh & Co.)

(Disclaimer: This article contains information in summary form and is intended for general guidance only. It is not expected to be a substitute for detailed research or the exercise of professional judgment. Neither the author, his organization nor its affiliates can accept any responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this document. On any specific matter, reference should be made to an appropriate advisor)

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