Treat for FIIs: FM cuts tax on interest in govt, corporate debt

Government will cut the tax on interest payments to foreigners on government and corporate debt to 5 percent from up to 20 percent for a two-year period, in a bid to draw further inflows to bridge its current account deficit and polish its reformist credentials.

The move meets a long-term demand of foreigners and makes debt more attractive. Many other Asian countries such as Singapore do not tax such interest income.

Finance Minister P Chidambaram also clarified that a tax residency certificate issued by a foreign government would be an accepted proof of residency for tax purposes.

The cut will be effective from June 1, 2013 to May 31, 2015, he said.

The 10-year benchmark government bond yield fell as much as 4 basis points to 7.73 per cent while the Indian rupee breached 54 level to the dollar after the relaxation was announced.

The cut in the withholding tax follows recent easing in rules for investment in government and corporate bonds.

Chidambaram, who has been pushing reforms to draw inflows, recently met investors in roadshows in United States and Canada.

“Our estimate of $6-8 billion capital inflow in government bonds in 2013/14 fiscal year is at a upside risk following these measures.”

Foreigners have invested over $11 billion in Indian equities and nearly $3 billion in debt so far in 2013.