Strict norms on the anvil for tax-free infrastructure bonds

Last Updated: Mon, Apr 16, 2012 06:21 hrs

The finance ministry is set to come out with strict guidelines on tax-free infrastructure bonds in this financial year on matters concerning brokerage, commission and spending on advertising. This follows the irregularities noticed in the issuance of such bonds last year.

The ministry also favours fixing of coupon rates for infra bonds, to make sure they are not too high.

Finance minister Pranab Mukherjee had announced in the Union Budget that the government would allow Rs 60,000 crore worth of infra bonds as against Rs 30,000 crore brought in 2011-12.

A senior ministry official told Business Standard the Planning Commission had raised concerns on the irregularities noticed in the selection and expenses on the entities associated with brokerages, commission and advertisement in the bond issuances of some agencies in 2011-12. "We are going to make the guidelines very strict, so that there is no possibility of any irregularities," he added.

On interest rates, the official said the high effective yield of 11-12 per cent was attracting high net worth individuals (HNIs) to this instrument in a big way and it had been felt the coupon rates should not be too high. "It should not distort the market," he added.

Ministry officials said there were fears that the increase in tax-free infra bonds from Rs 30,000 crore last year to Rs 60,000 crore this year could mainly benefit HNIs, with the earlier income tax deduction allowed on an investment of Rs 20,000 a year in infra bonds having been done away with. "It is mainly HNIs who subscribe to such bonds. More, the infra bonds of Rs 60,000 crore allowed this year are only for state-run companies and the private sector does not benefit," said an official.

In 2010-11, private companies were allowed to float tax-saving infra bonds of another Rs 20,000 crore.

Though the tax benefit of deduction of Rs 20,000 for investment in infra bonds was continued in 2011-12, there is no mention of this in the 2012-2013 budget. With this benefit gone, the tax-free bonds of state-run agencies would only be preferred for tax saving on income from returns. The difference between tax-free and tax-saving infra bonds is that only returns are exempted from tax in the former, whereas the investment and returns are both spared in the latter.

A revenue department official said the tax deduction on investment of Rs 20,000 in tax-saving infra bonds was leading to loss of revenue and not helping the sector much. While the ministry had taken away the tax benefit on the debt side from the retail investor, it had opened a window on the equity side by announcing the Rajiv Gandhi Equity Savings Scheme.

The Budget has proposed a lock-in period of three years for first-time retail investors, but officials said this was only for staying invested in the stock markets. After the first year, an investor can exit a stock and reinvest in other equities.

The bonds expected this year are Rs 10,000 crore for National Highways Authority of India (NHAI), Rs 10,000 crore for Indian Railway Finance Corporation (IRFC), Rs 10,000 crore for IIFCL, Rs 5,000 crore for Hudco, Rs 5,000 crore for National Housing Bank, Rs 5,000 crore for Sidbi, Rs 5,000 crore for ports and Rs 10,000 crore for the power sector. In 2011-12, IRFC was allowed to raise Rs 10,000 crore, NHAI Rs 10,000 crore, Hudco Rs 5,000 crore and ports Rs 5,000 crore.

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