Infra debt funds set to get tax sops

The proposed debt funds for infrastructure would be in the form of venture capital (VC) or private equity (PE) funds and would qualify for special tax incentives. These funds, to which foreign investors are expected to subscribe to, would also be given exemptions from Sebi regulations for foreign VC funds and also the RBI rules on external commercial borrowings (ECBs), official sources said.

When contacted, department of economic affairs secretary, R Gopalan, said the detailed criteria for these funds, which are expected to play a major role in bridging the country’s infrastructure deficit, would be notified within a month. He, however, refused to give further details.

In normal course, creation of such debt funds are required to meet the relevant Sebi norms for foreign venture funds, RBI rules on external commercial borrowings. The special dispensation is being mulled with a view to providing regulatory leeway to the proposed funds, the sources added.

Finance minister Pranab Mukherjee proposed setting up of dedicated infra debt funds in order to catalyse the flow of foreign funds to India’s infrastructure sectors, which need long-term, low-cost funds. The country faces a 30% gap in its infrastructure funding requirement—set at R41 lakh crore in the twelfth five year plan (2012-17).

As for the tax incentives, the government has already incorporated the changes that will be needed to float these funds in the Finance Bill, 2011 itself. According to budget papers, Section 10 of the Income Tax Act is being amended to provide enabling power to the Central government to notify an infrastructure debt fund. The income of such fund would be exempt from tax, but it would require to file a return of income.

Section 115A will also be amended to provide that any interest received by non-resident from such a fund is taxed only at 5%. These amendments are proposed to take effect from June 1, 2011. The lower withholding tax of 5% is aimed at attracting overseas investors.

Sources added that a policy decision has been taken to give the special regulatory benefits to the proposed infrastructure debt funds without having to amend existing rules. “When Planning Commission came out with the idea of such a Fund, they said certain exemptions should be given to it from the Sebi regulations as a special dispensation. We thought it would look odd if exemption is given to one particular fund. So a general framework is being worked out so that all such funds can enjoy these benefits,” the sources said.

Planning Commission had originally proposed a $11 billion India Infrastructure Debt Fund.

Source: Financial Express