DFI bond subscribers to get tax reimbursement from Centre's Rs 5K cr grant

The government-owned development finance institution (DFI) will not issue tax-free bonds, but subscribers will get reimbursement for the taxes paid from a Rs 5,000-crore grant from the Centre. 

"Instead of allowing the DFI to raise money through tax-saving instruments, the Bill provides that the tax element will get neutralised through this corpus," said a senior finance ministry official. 

The Cabinet on Tuesday approved the Bill to create the government-promoted DFI.  

Explaining the contours, another official said the DFI would compensate for the tax outgo of the institutions putting money in it. "And that’s how they can enjoy the tax benefits for 10 years. In case the grant amount gets exhausted before the tenure, the government would put in more money," he said. 

The government will even guarantee any overseas borrowing and pay the fee, if required, from the grant, the official said. The Rs 5,000-crore corpus will also help in defraying hedging costs if the DFI borrows from multilateral or bilateral lines, he said.

The funds and companies coming from the countries with which India has tax treaties will also get these benefits, the official explained. The intent is to make the cost of funds available at a cheaper rate. 

So far as tax on the government-backed DFI itself is concerned, it may get similar tax incentives that are currently given for profits and gains for enterprises engaged in infrastructure development under Section 80-IA of the Income-tax Act. This exemption will be provided through amendments to the Finance Bill, another official said.

A similar incentive was announced by Finance Minister Nirmala Sitharaman in the last Budget that offered a 100 per cent tax exemption on the returns of sovereign wealth funds in infrastructure projects, with a motive to fund the Rs 111-trillion national infrastructure pipeline.

The DFI would have 13 board members, including a chairman, two government nominees, and four whole-time directors. Wholetime directors will include a chief executive officer and three other members. 

The Bill seeks to provide protection to key decision makers in the DFI as the body would invest in riskier assets that banks and other financial institutions do not opt to fund, one of the two officials cited above said. 

"The provision to ring-fence the decision maker from prosecution was originally mentioned as a recommendation in the Kelkar committee report, and collective decision making should not carry any apprehensions of future harassment by investigative agencies," said Vinayak Chatterjee, chairman at Feedback Infra.

Besides this, if the DFI transfers assets of a company, it will be entitled for a stamp duty exemption. An amendment to enable the change would be separately done, the official quoted above said.

These proposed changes will help in attracting long-term capital from pension funds that look at investing patient capital for over 25 years, he said. "A government-backed DFI would be an attractive and safe investment for them," he added. The government will soon ask regulators to increase the investment cap for such funds, he said.

The Bill also has an enabling provision for setting up a private sector DFI in the country, as the government thinks India needs more than one such institution to fund the country’s infrastructure needs. The privately run DFI will get tax exemption on earnings for a period of five years as against a decade for the government-backed DFI.