Opposite Direction

The withholding tax on interest income is having reversal effect on treasury instruments, with the government effectively paying the tax up front at the time of the auction.

rnWhile the 10 percent tax pushes the cost of borrowing up, dealers end up adding the tax when they bid at the auctions.

rnImposing the tax on treasury instruments is also likely to create a hole in government coffers this year. Analysts put the shortfall to around Rs. 7 bn to 8 bn, but Treasury officials refused to speculate on the issue.rnTreasury officials say an exemption is the best way out of the present mess, while the other option remains to impose the levy through tax returns.

rnThe move, however, has been beneficial to corporate and retail users. Corporate investors, who earlier paid a 35 percent corporate surcharge tax, now pay only 10 percent. The growing retail market also gets a shot to invest in treasury instruments at a higher rate.

rnSince the tax came into operation from May 1, one-year treasury notes have shot u