Continuing the slew of reforms initiated by the UPA government, Finance Minister P Chidambaram today cut the withholding tax on overseas borrowings to 5 per cent from 20 per cent and approved the Rajiv Gandhi Equity Scheme to attract more investment and supress demand for gold.
"The Rajiv Gandhi Equity Savings Scheme will encourage more first time retail investors to invest in stock market.
Secondly the easing of tax is to encourage overseas borrowing.
Interest rates are low abroad and these low cost funds can come to India," Chidambaram told reporters here.
The stock market responded positively to the announcement with the BSE Sensex closing 404 points higher at 18,752.83.
These decisions, which aim at improving sentiments in stock market, come within days of government taking tough measures like raising diesel prices by over Rs 5 a litre and allowing foreign direct investment in multi-brand retail.
The Rajiv Gandhi Equity Savings scheme (RGESS), which was announced in budget in March, would provide a 50 per cent tax deduction on investments up to Rs 50,000 to investors whose annual taxable income is below Rs 10 lakh.
These investors can put in money through the mutual funds and exchange traded funds and the investments would be locked-in for a total of three years.
"It will act as alternative financial instrument and encourage more people to invest in this instrument rather than gold, which is a dead instrument", Chidambaram said.
The scheme would cover stocks listed under BSE 100, CNX 100 and Navratna, Maharatna and Miniratna public sector firms.
Investors can also invest in follow-on-public offer (FPO) of such PSUs and initial public offering (IPO) of PSUs with turnover more than Rs 4,000 crore, a move which is expected to give a push to the government's disinvestment drive.
The Centre aims to raise Rs 30,000 crore from minority stake sale in PSUs in the current fiscal. However, with six months already over, no company has yet hit the market.
Chidambaram said, the RGESS "not only encourages the flow of savings and improves the depth of domestic capital markets, but also aims to promote an 'equity culture' in India. This is also expected to widen the retail investor base in the Indian securities markets".
The Department of Revenue would soon notify the scheme and market regulator Sebi will issue relevant circulars to operationalise it in two weeks.
As in case of post office savings scheme and insurance policies, Chidambaram said "this tax break for