FM Nirmala Sitharaman may propose tax relief for global debt investors in Budget

Finance minister Nirmala Sitharaman will likely consider a capital gains tax waiver in the Union Budget for overseas debt investors, a move that will set the stage for India's inclusion in the keenly tracked global bond indices of Bloomberg-Barclays and JP Morgan, three people familiar with the matter told ET.

The waiver-and resultant inclusion of Indian debt instruments in global bond indices-should spawn significant capital flows into local debt securities, potentially driving down yields in Asia's third-biggest economy.

Offshore investors are expected to start trading in select sovereign securities following their inclusion in global bond indices. That should draw as much as $250 billion of inflows over the next decade and reduce India's cost of borrowing by up to 50 basis points, a Morgan Stanley estimate showed.


'Tax to Hamper Liquidity'
"If capital gains tax is applied on each bond transaction, it will hamper liquidity significantly, which goes against the global indices," said Sudip Chatterjee, head of global capital markets at international securities settlement platform Euroclear. "This means that we have to change our basic model and split the omnibus model into a segregated mode."

An overseas investor is supposed to pay a short-term capital gains tax if a listed bond is sold within 12 months. The tax incidence is in the range of 30-40% depending on the nature of investor.

Abolition of capital gain liabilities is perhaps the easiest path toward having Indian debt listed on Euroclear, Krishnamurthy Subramanian, former chief economic advisor to the finance ministry, had said last year in July.

"If you want to be listed on Euroclear, then there is a decision that has to be made on the capital gains part," he had then said in an interaction with Bloomberg. "The cleanest solution is to remove capital gains tax."

The finance ministry did not immediately respond to ET's query.

Waiver on short-term capital gain liabilities will help remove the final hurdle for India's inclusion in the indices that global financial hubs track for parking surplus cash. Platforms such as Euroclear cannot calculate such a tax levy, which was billed as an impediment toward drawing overseas fund flows.

Sovereign entities list their securities on global indices to help enhance liquidity - and hold down the cost of borrowing.

"It is not feasible and defeats the key purpose (liquidity) on why countries include sovereign papers in global indices," Euroclear's Chatterjee said.

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

Bonds foreign portfolio investors (FPIs) could purchase under the Fully Accessible Route (FAR) are now at about '16.98 lakh crore spread across 17 different tenors, show data from the Clearing Corporation of India. Maturities of those securities range from 2024 to 2051.

"The government may consider a beneficial capital gain tax regime for secondary market sales to sweeten the deal for offshore investors," said Vishal Shah, partner - PWC India. "Equities are not comparable with debt as they have multiple investment options."