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India Explains Withholding Tax Rationalization Plans

by Mary Swire, Tax-News.com, Hong Kong

27 May 2013


Changes to the Indian withholding tax (WHT) regime will encourage greater foreign investment in the country's debt securities and aid the development of the debt market, the Finance Ministry has claimed.

The Ministry has issued guidance on the planned reforms, outlining how investors can expect to be affected.

Last year's Union Budget lowered the WHT rate on interest payments on the borrowing of Infrastructure Debt Funds (IDF) from 20 percent to 5 percent. Finance Minister P. Chidambaram's 2013 Budget added new clauses to the Income Tax Act, to provide the same treatment for interest paid on money borrowed in a foreign currency from an external source during a three year period, under a loan agreement and by way of long-term infrastructure bonds.

Chidambaram also announced that reduced WHT rates would be offered in cases where an investment is made by a non-resident in any rupee-denominated long-term infrastructure bond. However, it has since been decided that the 5 percent rate will be made available in respect of interest accrued on an investment made in bonds issued by Indian companies and Government securities. The aim is to encourage greater offshore investment in the debt market by Foreign Institutional Investors (FIIs) and Qualified Foreign Investors (QFIs).

Similarly, considering the practical difficulty involved in non-resident obtaining a Permanent Account Number (PAN), the reduced rate will now be applicable even if a PAN is not obtained by the entity responsible for the payment of interest and the deduction of tax.

TAGS: compliance | Finance | tax | investment | tax compliance | India | interest | revenue guidance | ministry of finance | tax authority | offshore | tax rates | withholding tax | tax reform | currency

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