The Centre has received representations from industry to cut the withholding tax on interest income earned by foreign investors from debt securities to 5 percent from 20 percent, sources said.
The proposal is aimed at attracting higher foreign portfolio investment inflows, which would help ease pressure on the rupee, sources in the industry said.
The rupee has depreciated around 6 percent against the dollar since the start of the Iran war. On May 27, the rupee was trading at 95.7 against the dollar after falling to new lows in recent weeks.
According to the RBI Bulletin, net  foreign portfolio investment (FPI) outflows touched $13.1 billion in March against a net inflow of $4 billion in the year-ago period.
The forex reserves were at $689 billion on May 15. Just before the start of the Iran war, on February 28, the reserves stood at an all-time high of $726 billion.
5% tax
Foreign investors pay a withholding tax (tax deducted at source) of 20 percent on interest income from government bonds. Till July 1, 2023, the rate was 5 percent on income from government securities, state development loans and rupee-denominated bonds.
The 5 percent rate was initially introduced in 2013 as a measure to curb the rupee’s decline in the wake of the so-called taper tantrum. “It was intended to be a short-term measure but the tax rate stayed the same for over a decade. In 2023, the government decided to hike the tax rate (on interest income from debt securities) to 20 percent to keep it similar to the rates applicable on capital gains,” one of the sources said.
The long-term capital gains tax on debt instruments is 20 percent, with indexation benefit.
What do experts say?
The discussions come at a time when India is seeking to increase foreign participation in its bond market, particularly following the inclusion of government bonds in global indices such as JPMorgan and FTSE Russell, an tax expert said.
“Foreign investors currently account for a relatively small share of India’s bond market, and tax rationalisation is being viewed as an important lever to improve post-tax returns and enhance market liquidity,” he said.
Debt investors are sensitive to taxes, another tax expert said. “Considering that debt investments have fixed returns, the spread on leveraged investments can be thin and there could be challenges in claiming full tax credits. Therefore, a reduction in withholding tax rates can materially boost investments in debt,” he said.
Source from: Â https://www.moneycontrol.com/news/business/industry-asks-centre-to-cut-fpi-withholding-tax-on-debt-securities-to-5-13933022.html
