To attract more foreign investment into the domestic corporate bond market, the government is set to slash the rate of tax that foreign portfolio investors (FPIs) pay on their interest income from non-infrastructure corporate bonds from 20% to 5%.
This tax on interest payment is withheld by the issuer and paid to the government on behalf of the subscriber.
This measure is part of a series of reforms suggested by the capital markets division of the finance ministry and may be announced by Arun Jaitley in his Budget on July 10, according to government sources.
Officials told FE that the aim was to bring the withholding tax on non-infrastructure bonds at par with that on infrastructure bonds and external commercial borrowings (ECB).
Currently, the withholding tax paid by issuers of infrastructure bonds on the interest income earned by investors is 5%. In case of ECB also, the withholding tax is 5% of the interest income earned by the foreign lender. “We are aiming for uniformity in withholding taxes for all corporate bonds, whether the end use of the debt inflow is for infrastructure projects or not.
Hence, it may be 5% for all corporate bonds,” said a government official. Officials hope that the move will help increase FPI participation in corporate bonds as investment in this class has lagged behind such investment in government debt. The upper limit on FPI participation in corporate bonds is $51 billion or Rs 2.44 lakh crore, out of which FPIs have only invested about Rs 91,457 crore, or 37.4%, as of June 30, according to National Securities Depository Ltd (NSDL) data.
Compare this with the FPI participation in government bonds through the auction route. The upper limit in this category is $20 billion, or Rs 99,546 crore. FPIs have already invested Rs 94,030 crore, or 94.5% in these bonds as of June 30.
“It is a logical step. We need to revive foreign investment in the corporate debt market. One of the reasons of low FPI participation in non-infrastructure corporate debt is the high withholding tax. A reduction will provide the incentive for FPIs to invest in this class,” said Madan Sabnavis, chief economist with Care Ratings.
As reported by FE earlier, the finance ministry is exploring a number of measures to boost foreign and domestic participation in capital markets including allowing infrastructure investment trusts, notifying new rules on depository receipts and ECB, easing de-listing norms