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Tax Alert: Government of India grants tax exemption on Masala Bonds to augment foreign exchange inflows

20 September 2018

The Central Board of Direct Tax (CBDT), vide its Press release dated 17 September 2018, has granted tax exemption on interest payable on Rupee Denominated Bonds (RBDs), also known as Masala Bonds, which are issued during the period 17 September 2018 to 31 March 2019.

With the intent to incentivise low cost foreign borrowings and to help economy contain the Current Account Deficit (CAD), the Government of India has announced that where an Indian company or a business trust (i.e. REIT or INViT ) accesses foreign borrowings market under the RDB route, interest payable on such borrowings shall be exempt from tax in India. While the notification amending the tax law is awaited, the Press Release indicates that this exemption is subject to meeting certain conditions, which are as follows:

  1. The borrowings must be under the RDB route
  2. Only the monies borrowed under RDBs issued during specified period i.e. 17 September 2018 to 31 March 2019 shall be eligible
  3. The borrower must be an Indian Company or a Business Trust (i.e. REITs and INVITs)
  4. Lender must be a non-resident (including a Foreign Company)

Making this channel of borrowing completely tax free for the lenders and more lucrative than other modes of investment (such as ECBs, or foreign currency loans) can help the Government achieve a two fold objective (1) Provide an impetus to the global market to deploy more funds towards the growing Indian economy and (2) Protect the exposure of the Indian economy towards declining domestic currency as RBDs are rupee denominated and not serviced in foreign currency.