Tax relief: Finance Minister Nirmala Sitharaman may offer tax relief for global debt investors in the budget

Finance Minister Nirmala Sitharaman is likely to consider a capital gains tax exemption in the Union budget for foreign debt investors, a move that will set the stage for India’s inclusion in bond indices Globally followed Bloomberg-Barclays and JP Morgan, three people familiar with the case told ET.

The waiver – and the resulting inclusion of Indian debt securities in global bond indices – is expected to trigger large flows of capital into local debt securities, potentially driving down yields in India’s third-largest economy. Asia.

Foreign investors are expected to start trading certain sovereign securities after their inclusion in global bond indices. This is expected to attract up to $250 billion in inflows over the next decade and reduce India’s cost of borrowing by up to 50 basis points, according to a Morgan Stanley estimate.

“A tax to hamper liquidity”

“If capital gains tax is applied on every bond transaction, it will significantly hamper liquidity, which runs counter to global indices,” said Sudip Chatterjee, head of global capital markets at the Euroclear international securities settlement platform. “That means we need to change our base model and split the omnibus model into a separate mode.”

A foreign investor is expected to pay a short-term capital gains tax if a listed bond is sold within 12 months. The tax impact is around 30 to 40% depending on the nature of the investor.

Abolishing capital gains liabilities is perhaps the easiest route to getting Indian debt listed on Euroclear, Krishnamurthy Subramanian, a former chief economic adviser at the finance ministry, said last year in July.

“If you want to get listed on Euroclear, then there’s a decision that has to be made on the capital gains part,” he said in an interaction with Bloomberg at the time. “The cleanest solution is to remove the capital gains tax.”

The Ministry of Finance did not immediately respond to ET’s question.

The waiver of short-term capital gains liabilities will help remove the final hurdle to India’s inclusion in the indices that global financial centers track for parking excess cash. Platforms such as Euroclear cannot calculate such a tax levy, which has been presented as an obstacle to attracting flows of foreign funds.

Sovereign entities list their securities on global indices to help improve liquidity – and keep down the cost of borrowing.

“It’s not feasible and defeats the key objective (liquidity) of why countries include sovereign paper in global indices,” Euroclear’s Chatterjee said.

Euroclear operates in 49 different countries. None of them have capital gains tax on bond transactions.

Bonds that Foreign Portfolio Investors (REITs) could purchase under the Fully Accessible Pathway (FAR) now stand at around 16.98 lakh crore spread across 17 different tenors, according to data from the Clearing Corporation of India. . The maturities of these securities range from 2024 to 2051.

“The government may consider an advantageous capital gains tax regime for secondary market sales to sweeten the deal for foreign investors,” said Vishal Shah, Partner – PWC India. “Stocks are not comparable to debt because they have multiple investment options.”

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