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By Arup Roychoudhury
NEW DELHI, July 5 The Indian government has no
plan to reduce withholding tax applicable for foreign investors
buying government bonds as demand for these bonds are strong, a
senior finance ministry official said on Thursday.
Bond dealers have been expecting the government to reduce
such taxes to boost foreign fund inflows into India.
Some sell-off took place in government bonds after the
official's comments. The second-most traded bond, 8.79 percent
2021, had gone up marginally to 8.3416 percent
from 8.3267 percent before the news.
"Withholding tax is one of the key reasons why the FII
(foreign institutional investor) auction is not getting good
response," a trader with a foreign bank said.
"I have to pay a withholding tax for the full six months
even if I buy a bond with a half-yearly coupon in August," the
India's debt limit auction on Wednesday met tepid investor
response due to investment restrictions in the auctioned limits
and because of thin participation by some investors on account
of a U.S. holiday.
However, the government will reduce withholding tax from 20
percent to 5 percent on foreign investment in long-term
infrastructure bonds and on external commercial borrowings in
certain sectors like power, airline, roadways among others, the
"We will not do this (reduce withholding tax) with
government bonds as there is already enough demand for that. If
there is demand for my products I will in fact raise prices,"
said the official, who declined to be identified as he was not
authorised to speak to the media.
Pranab Mukherjee, the then finance minister, had proposed a
cut in withholding tax on external commercial borrowings (ECB)
in certain infrastructure sectors in his 2012/13 budget.
Foreign investors pay withholding tax of as much as 20
percent, depending on the tax treaty India holds with the
corresponding country. A similar tax is applicable in many
countries, including Indonesia and South Korea.
Withholding tax is a tax levied on incomes such as interests
and dividends from securities owned by non-residents.
(Writing by Suvashree Dey Choudhury; Editing by Jijo Jacob)