FIIs to pay 5% withholding tax on gilts,corp bond incomes

“In order to provide broad-based incentive and encourage greater offshore investment in debt market by FIIs and QFIs,it has been decided that the benefit of lower withholding tax (i.e. 5 per cent instead of 20 per cent) shall be available in respect of interest on investment made in bonds issued by Indian companies and government securities,” the finance ministry said.

The government has been working on developing a vibrant corporate debt market in the country,the size of which,is estimated at 11.8 per cent of GDP,lower than the average for emerging East Asia at 17.2 per cent. For Japan the percentage is even higher at 19.8 per cent.

Currently,investments in debt instruments is unviable for FIIs as the tax rates are very high,especially after including the cost involved in hedging the exchange risk.

They current withholding tax deduction is anywhere between 20.6 per cent and 21.012 per cent depending on the nature and net taxable income of the FII.

The benefit will be available on interest income of FIIs and qualified foreign investors (QFIs) accruing between June 2013 and May 2015 irrespective of the date of investment,the statement added. However,skeptics are of the view that even after addressing the tax concerns,the government may not be able to get the FIIs invest as much as it wants because of several pending issues including stamp duty and regulatory overlaps.

While the corporate bond market is not liquid,there are several overlaps between Sebi and RBI as regard to who will be the guiding authority,and these issues need to be addressed first,experts say.

Higher stamp duty and the existing arbitrage due to inter-state variations increases the cost of issuing such papers.

Earlier,in Budget 2011-12,the rate of withholding tax on interest payments on the borrowings of Infrastructure Debt Funds (IDF) was reduced from 20 per cent to 5 per cent with an aim to enhance resource availability for infrastructure development.

The tax rate was subsequently reduced from 20 per cent to 5 per cent in respect of interest paid on money borrowed in foreign currency from abroad for three year period during July 2012 to June 2015 on borrowings under a loan agreement and by way of infrastructure bonds issued in foreign currency.

Later in Budget 2013-14,finance minister P Chidambaram had announced that necessary changes are proposed to provide benefit of reduced withholding tax to cases where investment is made by a non-resident in rupee denominated long-term infrastructure bonds.

Also,the finance ministry has relaxed know your customer (KYC) norms for non-resident investor in case of investment in long-term infrastructure bonds. They need not furnish PAN for availing of the tax benefit.