New Delhi: In a bid to attract greater FII participation in the debt market, the government today said foreign investors will pay only 5 percent withholding tax on interest earned from such investments till May 2015.
"In order to provide broad based incentive and encourage greater off-shore investment in debt market by FIIs and QFIs, it has been decided that the benefit of lower withholding tax [i.E. 5 percent instead of 20 percent] shall be available in respect of interest on investment made in bonds issued by Indian companies and Government securities," the Finance Ministry said in a statement.
Notifying the decision, it said the reduction in rates and simplification of the withholding tax norms is expected to deepen the Indian debt market and accelerate the pace of growth of the Indian economy.
The benefit will be available on interest income of Foreign Institutional Investors (FIIs) and Qualified Foreign Investors (QFIs) accruing between June 2013 and May 2015 irrespective of the date of investment, the Ministry added.
In 2013-14 Budget speech, Finance Minister P Chidambaram had announced that necessary changes are proposed to provide benefit of reduced withholding tax to cases where investment is made by a non-resident in rupee denominated long term infrastructure bonds.
In the 2011-12 Budget, the rate of withholding tax on interest payments on the borrowings of Infrastructure Debt Funds (IDF) was reduced from 20 percent to 5 percent with an aim to enhance resource availability for infrastructure development.
Subsequently, the tax was reduced from 20 percent to 5 percent in respect of interest paid on money borrowed in foreign currency from abroad for three year period during July 2012 to June 2015 on borrowings under a loan agreement and by way of infrastructure bonds issued in foreign currency.
The government has already simplified KYC norms for investments in long term infrastructure bonds by non-resident investors. They now do not need to produce PAN to avail the benefit of reduced withholding tax.