Finance minister P Chidambaram chose to provide clarity and comfort to foreign investors by diluting provisions on tax residency certificate (TRC) and lowering tax on interest payments to investments in government and corporate bonds when he moved amendments to the Finance Bill,2013 in the Lok Sabha on Tuesday.
TRCs issued by countries like Mauritius for investors from the island putting money in the Indian stock markets will be accepted as a certificate of residency by Indian tax officials. This will enable these investors to get benefits under double tax avoidance agreements,although additional information can be sought from them. Removing another irritant to foreign investors,Chidambaram also dropped a provision seeking TRCs in a prescribed format.
Additional information can also be asked by the government but the TRC issued by a foreign government will be accepted as a certificate of residence, he said outside parliament.
The original proposal that called the TRC a necessary but not a sufficient condition to take advantage of the DTAAs had created uncertainty amongst investors,especially those who route investments through tax havens such as Mauritius.
The Budget announced in February did not have any negative impact on investors. But the measures announced today are welcome and the TRC has the biggest impact on foreign investors, said Dinesh Kanabar,deputy CEO,KPMG. In April the foreign institutional investors have put in $ 538 million.
Meanwhile,to attract more foreign investment in rupee-denominated government corporate bonds and securities,the minister also slashed the tax on interest payments to foreign institutional investors and qualified foreign investors on such instruments to 5 per cent from 20 per cent for a two-year period till May 31,2015.
Hoping to attract long-term financing for core sector projects,the minister also clarified that PAN requirement and a higher withholding tax of 20 per cent would not apply to interest paid to non-resident in respect of investment in long-term infrastructure bonds.
The Union Budget 2013 -14 has several provisions that can facilitate in reviving the investor sentiment. Of course some revisions in investment allowance limit provided to the industry would have helped had they been extended to benefit the SMEs as well. Lending support to investors will be most crucial, said A Didar Singh,secretary general,Ficci.