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Friday , July 11 , 2014
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Withholding tax norms relaxed

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Mumbai, July 10: In a bid to lure more foreign investment into corporate bonds issued by a domestic entity, Union finance minister Arun Jaitley today extended the five per cent withholding tax to all bonds.

Earlier, investors were subject to a withholding tax of 20 per cent on bonds issued by non-infrastructure companies while it was lower at five per cent in the case of issuers of infrastructure bonds. Withholding tax is a process where the tax paid by a subscriber is deducted by the issuer and paid to the government.

While tabling the budget, finance minister Arun Jaitley said he is proposing to extend a liberalised facility of five per cent withholding tax to all bonds issued by Indian companies abroad for all sectors and the validity of the scheme is being extended to June 30, 2017.

At present, Section 194LC of the Income Tax Act provides for lower withholding tax rate of five per cent on interest paid by an Indian company to non-residents on foreign currency borrowings outside India through issue of long-term infrastructure bonds. This facility is available for issuances made after July 1, 2012 and it was available till July 30, 2015.

Experts pointed out that the proposal will not only encourage foreign investment into domestic corporate bonds, but it will also benefit them as they can look at other avenues to raise funds. Moreover, it will also bring down the pressure on the domestic banking sector.

“In order to further incentivise low cost long-term foreign borrowings by Indian companies, it is proposed to amend section 194LC to extend the benefit of this concessional rate of withholding tax to borrowings by way of issue of any long-term bond, and not limited to a long term infrastructure bond,” the budget said.

However, this was not the only relaxation given to domestic companies when it came to overseas borrowings. Jaitley further announced that regulations pertaining to American Depository Receipts/Global Depository Receipts (GDRs) will be liberalised wherein companies will be allowed to issue such instruments on all permissible securities. An ADR is a security which represents the share of a non-US company.

While details were not available, the union finance minister also announced that the government will revamp the Indian Depository Receipts (IDRs) framework and replace it with what it called “Bharat Depository Receipt (BhDR)”.