As we build up towards the Budget day on 1 February, let us take a look at some of the more intricate taxation aspects which the government should really consider to strengthen the collective economic situation through more foreign investment and securing better returns for individual citizens -
1) Section-194LB, 194LC, 194LD-Withholding tax on interest to non-residents
Currently, the Indian government charges a TDS of 5 percent on all interest payments to non-residents. This tax, however, runs in contradiction to the objectives of SEBI and RBI to strengthen the bond market framework in India. Foreign investors shy away from debt deals, or try to transfer the tax burden on Indian issuers. It also counteracts the long-term, low-cost borrowing opportunities from foreign shores that successive governments have planned to tap in. Finally, contrary to the maxim of enhancing ‘ease of doing business’ it increases the compliance burden.
Recommendation: Abolish withholding tax on interest payments to non-residents in respect of their investments in bonds or ECB of Indian Companies.
Benefits: The abolition would help funnel more investments in the bond market. Although the treasury might suffer from loss of revenue in the short-run, the long term boost to the economy through enhanced foreign investment will far outweigh them. Foreign investors take more risks, in fact, they invest in bonds ranging from BB to AAA, whilst domestic institutions tend to focus on instruments in the AA and above category. This creates a significant social impact and strengthens the financial prospects of enterprises in MSME financing, Micro Financing, tier-II and III market start-up schemes etc.
2) Channelling fixed deposits to bond market
Indian banks have large sums of fixed deposits which are illiquid instruments and slowly losing attractiveness with the increasing penetration of debt mutual funds. While investments in government bonds and public schemes grow at a snail’s pace, market-linked investment avenues are promising high growth rates, and third-party players are making them much more accessible.
Recommendation: Permit banks to offer listed deposit liabilities on stock exchanges, thereby granting depositors liquidity based on market-linked pricing, rather than the hefty premature withdrawal penalty applicable now.
Benefits: The recommendation if implemented will enable banks to continue to build their deposit book and provide much-needed depth in the bond market, with the availability of a wider array of instruments and participation of retail investors. Operationally, the guidelines can be structured similar to the prevailing guidelines for Certificate of deposits.
3) Need for removing restrictions imposed by RBI norms for FPI investments in debt
The start-up ecosystem in India, while thriving, is yet to reach its potential. In such a scenario, concentration limits imposed on Foreign Portfolio Investments in the RBI norms notified on 27 April 2018 in venture debt further puts emerging homegrown businesses on a back-foot. Domestic investors due to lower risk appetite and other restrictions, take small exposures of Rs 5 to 15 crore on companies with lower credit ratings having BBB- to BBB+, whereas FPIs take an exposure of Rs 60 to 100 crore on similar rating of the company.
Recommendation: Urgent need to remove the restrictions that imposed single/group limits and concentration limits on investments by FPIs in corporate bonds.
Benefits: FPIs have shown interest in funding Indian companies across rating bands, from BB to AAA. They have the ability to invest large amounts ranging from Rs. 50 crore to Rs. 250 crore. In such a scenario, finding a domestic counterparty or overseas lender (to meet the guideline as notified on 27 April 2018), who can match the FPI investment in a bond in terms of Size, Tenor, Rate of Interest has become impossible. Such removal of restrictions will help to provide more funding opportunities to businesses.
4) Reforms for the development of MSME sector
The Budget is expected to further ease out compliance burden and facilitate ease of business for SMEs. Since the rollout of GST, the Central government has been increasingly focusing on MSMEs. In fact, the finance minister has termed MSMEs as the backbone of the economy outlining that this sector is poised to lead the consolidation phase in the economy.
There have been regular measures to boost SME business with a) launching of online portal for loans up to Rs. 1 crore in 59 minutes b) easing of debt restructuring norms with announcement of guidelines on a one-time restructuring of existing debt up to Rs 25 crore for the companies which have defaulted on payment, but the loans given to them have continued to be classified as standard assets. Rating agency ICRA has estimated that up to Rs 10,000 crore of loans to small business will be structured.
Hopes are also pinned on exempting MSMEs from tax on capital gains, arising out of property sale. Credit to MSMEs is not readily available and a large portion of MSMEs still rely on collateral backed loans from banks/ FIs and often many of them end up in self-funding by selling land or properties. Easy access to credit for MSMEs is still being a challenge and we expect some further measures and digital initiatives to boost lending in this segment.
(The writer is Founder & MD, NeoGrowth Credit Pvt. Ltd. )
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Updated Date: Jan 21, 2019 15:53:55 IST