Govt. May Slash Withholding Tax Rate to 5%

While less than 5% tax is charged in select infra sector,rest of the foreign investment in corporate bonds faces 20% tax deduction

The government is looking to cut withholding tax rate for foreign investments in all types of corporate bonds,as it eyes fresh measures to top up the budget proposals when finance minister P Chidambaram replies to the debate in parliament.Under current norms, foreign investments in corporate bonds face 20% tax deduction.A lower withholding tax of 5% is available only in select infrastructure sectors.The high 20% withholding tax is adjustable against the final tax liability of the investor,but it is seen as an irritant by foreign investors.There is a thinking that withholding tax rates should be cut to 5% for all segments ... a senior finance ministry official said.Withholding tax is the tax deducted from a payment made that is like an income for the receiver, such as dividend,interest,royalty or even capital gains. Lower withholding tax is expected to make Indian debt more attractive to foreign investors,which in turn would help companies raise cheaper funds.A cut in the rate will also help the government get much needed capital flows to bridge its record high current account deficit.Any measure to reduce rates of withholding tax on investments in debt instruments will have a positive impact, taken in conjunction with the measures recently introduced to deepen the FII participation in the debt market, said CR Sasikumar,managing director of SBI-Soc Gen Custodial Services.The government is also mulling relaxing the tight sub-limits such as one yearmaturity, three-year maturity and infrastructure category.The finance ministry is working with the Reserve Bank to explore the possibility of giving more flexibility to move between the various sub-categories,in keeping with their preference or if the limit is exhausted in one category.A lower withholding tax has also been backed by various committees set up by the government to develop the domestic corporate bond market.However,the finance ministry has adopted a measured approach to easing rules for investments,as the central bank has favoured a cautious approach given the volatile nature of these flows.However,with financing the current account deficit,which is expected to touch an all-time high of 5% of GDP in the current year,becoming a bigger worry,the government is left with very few options.In the last budget,the then finance minister Pranab Mukherjee had lowered the withholding tax on external commercial borrowings for sectors such as power, airlines,roads and bridges,ports and shipyards,affordable housing, fertiliser and dams to 5% from 20%.

Economic Times, New Delhi, 07-03-2013