Private sector may get to float tax-free infrastructure bonds

The government may allow private sector companies to raise funds by floating long-term infrastructure bonds that will be tax-free....

The government may allow private sector companies to raise funds by floating long-term infrastructure bonds that will be tax-free. This will be similar to what specified government-owned institutions or select public sector undertakings PSUs are allowed to do today.

Addressing a conference organised by the Planning Commission on Building Infrastructure,Finance Minister Pranab Mukherjee said,It proposal to issue long-term infrastructure bonds will of course be for the private sector as well as the public sector.

As a measure to promote savings,he had,in Budget 2010-11,allowed individuals to invest an additional amount of Rs 20,000 over and above the Rs 1 lakh ceiling on tax saving instruments in long-term infrastructure bonds.

While Finance Ministry officials were not immediately available for comment,sources in government-owned financial institutions such as IIFCL that float such bonds said the government was likely to identify institutions banks or even companies in the private sector that may be allowed to tap this window for fund raising.

In the case of bonds floated by IIFCL,the entire investment is treated as a deduction from income for tax purposes. However,what the Finance Minister said today is subject to the enhanced ceiling of Rs 1,20,000 per individual, an IIFCL source said.

Private players such as Lamp;T have in the recent past raised funds for infrastructure projects but investors do not get any tax benefits. Economists who did not wish to be quoted said granting tax-free status to companies or banks in the private sector was tantamount to distorting the tax regime.

While on one hand the proposed Direct Tax Code seeks to do away with all exemptions,this move is retrograde, said an economist.

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The Finance Ministry is,however,likely to identify sectors for which money could be raised through such instruments. In the case of banks though,there will be tighter monitoring as they would have to abide by the cash reserve ratio CRR,or the portion of deposits that banks maintain with RBI and statutory liquidity ratio SLR,or investment in government securities.

State Bank of India recently indicated that it plans a retail bond issue of over Rs 5,000 crore. In the past,IDBI Bank and ICICI Bank have issued infrastructure bonds,but the income-tax benefit for investing in these bonds were withdrawn three years back.

Mukherjee today said that long-term infrastructure bonds entitled for the benefit would be notified by the government later. Noting that funding was a major constraint,he said,the decision will help in augmenting resources of public as well as private sector for developing the countrys infrastructure.The investment requirement for the infrastructure sector was pegged at 500 billion during the Eleventh Plan 2007-12 and is expected to double to over 1 trillion in the Twelfth Plan 2012-17.