Masala bonds later lost popularity among foreign investors and were issued outside India in rupee denominations.
The Income Tax (IT) department is believed to have asked several bond issuers to confirm whether DBS is the “beneficiary” of the bonds or is receiving interest income from investments on behalf of other entities, people familiar with the matter told ET.
Indian tax authorities are scrutinizing DBS Bank’s 2019 masala bond investments. The Income Tax Department seeks confirmation of the beneficial interest and interest received. The study was conducted following the tax exemption period for interest on masala bonds. This investigation aims to ensure compliance with investment regulations and tax benefits. Details of the bond issuance and RBI application have been sought.
From September 2018 to the end of March 2019, interest for masala investors was exempted from tax. This was a government move to increase infrastructure funding without exposing borrowers to the risk of currency fluctuations.
When an offshore financial institution held a bond on behalf of a customer, the interest received from the security was required to pass to the ultimate beneficiary of the bond.
The list of non-resident investors eligible for Masala bonds included high-net-worth individuals and multilateral institutions such as ADB and IFC, as well as foreign pension funds, sovereign wealth funds, mutual funds, foreign banks and insurance companies. Such investors were required to be members of the Financial Action Task Force and residents of countries whose securities market regulators are members of the International Organization of Securities Commissions. A foreign investor who is registered as a Foreign Portfolio Investor (FPI) with the Securities and Exchange Board of India (Sebi) will meet almost all the conditions met by an accredited investor. However, although masalas are denominated in rupees and issued by Indian companies, they are issued overseas, so foreign investors other than FPIs may also invest in these papers. In this context, the IT department investigated whether DBS Singapore was a registered FPI at the time of the investment.
agencyTax office wants details on bank ownership and investment compliance
DBS India, which was the intermediary in the matter in 2019 and is a subsidiary of DBS Singapore, did not respond to queries from ET.
If a foreign entity eligible to invest in Masala bonds pools funds from asset management clients who are not eligible to purchase the bonds, it may attract the attention of tax authorities. Also, resident investors who bet on foreign securities under the Liberalized Remittance Scheme (LRS) are not allowed to invest in masala bonds. The LRS allows Indian residents to invest up to $250,000 annually in foreign assets and securities, but not in securities issued by companies in India.
The issuer in question was further asked by the I-T department whether the interest rate offered on the bond was within the approved limits. It also sought copies of the loan registration number obtained from the Reserve Bank of India (RBI) in connection with this transaction, and all mandatory submissions made to the RBI for withdrawal of funds and subsequent remittance of interest and principal each abroad.
If some of the conditions are not met, the tax authorities may question the tax benefits available to the investor. From March 2019, withholding tax (the amount withheld by issuers before remitting interest to non-resident investors) will be fixed at 5%.
Interest in masala bonds waned for a variety of reasons, but the withholding taxes were significantly lower than the taxes paid by other foreign investors on Indian debt instruments. For non-resident investors from countries that do not have a tax treaty with India, the rate was 20%. 15% and 7.5% from treaty jurisdictions such as Singapore and Mauritius respectively, and 10% from investors based in IFSC GIFT City.
