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Journalism of Courage
The decision to reduce withholding tax for foreign investors is timely
An amendment to the Finance Bill reducing the withholding tax applicable on foreign investors buying rupee bonds from 20 per cent to 5 per cent,is a welcome move. The high withholding tax had made investment in Indian rupee bonds less attractive. At a time when the current account deficit is high,and foreign capital inflow can prevent rupee depreciation,this is an apt decision.
Many developing countries,including India,follow a source-based taxation system. A non-resident global investor would prefer to invest in a country with a residence-based taxation regime because then he is not taxed in the source country,so his entire income domestic as well as foreign is taxed only once in his country of residence. In contrast,under the source-based system,he would pay tax in the source country and would have to seek credit for such taxes in his home country. This raises his compliance burden and may not fully mitigate the tax burden in all cases if the tax rate in the source country is higher than the rate he faces in his home country,as was the case for many foreign investors with the withholding tax of 20 per cent. Traditionally,developing countries that have had source-based taxation have sought to reduce the compliance and tax burden by reducing tax rates for non-residents. A shift towards a residence-based system could be one of the components of Indias financial reform.
