The Finance Bill 2013 passed by an uproarious Lok Sabha on Tuesday without a debate also lowered taxes on interest paid to FIIs holding government and corporate debt. The move meets a long-term demand of foreigners and makes Indian debt more attractive, and is further to recent relaxations in the rules for investments in government and corporate bonds.
Separately, chief economic adviser in the finance ministry Raghuram Rajan said the CAD may have shrunk to less than 4% of GDP during January-March 2013 from a record high of 6.7% in the previous quarter as global commodity prices softened and exports started picking up. A Barclays report said on Tuesday that Indias CAD was likely to witness a gradual improvement in the next two to three years and was expected to come down to 3.9% of GDP this fiscal.
The Bill passed by the Lok Sabha dropped two requirements relating to TRC that FIIs needed to produce to claim double tax avoidance treaty benefits. It entirely dropped the earlier provision that a TRC to be provided by an FII was necessary but not a sufficient condition for claiming any tax relief. It also dropped the condition that such a certificate from a foreign tax treaty partner country has to contain such particulars as described by the Indian government. Now, FIIs merely have to produce a certificate of his being a resident and furnish other documents and information as may be prescribed by New Delhi. Experts said the move removed the uncertainty over the issue that unnerved many Mauritius-based FIIs after the Union Budget was presented earlier this year. Securing a TRC from another nation in the format that India wants was a difficult task, which has now been fully addressed, said a tax expert advising many FIIs.
Chidambaram later told reporters, Additional information can also be asked by the government but the TRC issued by a foreign government will be accepted as a certificate of residence.
Mauritius-based FIIs can sell the listed securities held in India without paying a 15% short-term capital gains tax until the General Anti-Avoidance Rules come into force in 2016 by just providing a TRC.
The government wants to have a provision to seek information to assess who actually is the beneficial owner of the income generated by a Mauritius-based entity, which will be a criterion to be applied along with tax residency to allow concessional tax rate on income from royalty and technical services rendered by an overseas entity.
Chidambaram also lowered the withholding tax on interest payments to FIIs on government and corporate debt to 5% from up to 20%. There is no tax on such interest income in many Asian nations such as Singapore while in India, interest payments on long-term infrastructure bonds currently attract a 5% concessional withholding tax. The cut will be effective from June 1, 2013, to May 31, 2015, Chidambaram said. These amendments will attract more investments, which is a very important need of the country, he said.
Welcoming the dropping of the TRC clause, BMR Advisors chairman Mukesh Butani said it would avoid confusion over eligibility of treaty benefits for all forms of foreign investors and not just FIIs.
Finance minister P Chidambaram, who moved these amendments, however, defended the increase in excise duty on SUVs from 27% to 30%, indicating no roll-back was in the offing. Ninety-eight per cent of SUVs run on diesel. Diesel is subsidised. So by increasing the excise duty from 27% to 30%, we are only partially recovering (the subsidy)...from rich people who use SUVs, the minister said.
The government also ruled out imposition of wealth tax on agricultural land as the Lok Sabha
completed the budgetary exercise with the Finance Bill and demands for grants for various ministries being passed without debate after an Opposition walkout. Let me make it absolutely clear that the policy of the UPA government is not to impose wealth tax on agricultural land, he said.
While the BJP staged a walkout over the coal issue in the Lower House, the Left, BJD and AIADMK left the House to protest against passage of important bills without discussion. The DMK too walked out, demanding the removal of PC Chacko as the head of the joint parliamentary committee looking into the 2G scam.