Doubtful times for debentures
Upcoming debentures will be challenged by the recent changes in the tax structure in the new Inland Revenue Act, analysts say.
Under the earlier law, tax on debt listings was exempt but now it’s taxable. Analysts say that earlier people bought debentures as it was tax free but now it will be a deterrent for future debentures.
Analysts point out that also with the low yield of 12.50 per cent for subordinated 5-year debentures a low appetite for these debt listings was to be expected.
The latest is the Siyapatha Finance Rs. 1 billion debenture issue completed recently which wasn’t oversubscribed on the first day. Its previous Rs. 2.5 billion debenture issue in September 2016 was oversubscribed on the first day itself with Rs. 3.6 billion worth of applications were received via 179 applications.
There is some confusion still on income taxes for debentures that are listed before 31 March 2018 but assuming that the tax holiday is no longer applicable, the rates are still not good enough, especially as Siyapatha Finance itself was offering higher rates on 4-year fixed deposits.
Also the corporate sector has been enjoying tax free income by investing in listed securities and unit trusts. Clarity on the latter is still at large. Last year’s budget proposals say that tax exemption granted on dividends paid by any unit trust to a unit holder will be excluded for corporate sector investors.
Analysts are awaiting the pricing of the upcoming LB Finance and NTB debentures to see if they can beat the taxes.