Tax relief on ECB borrowings on anvil

As a key measure to promote foreign inflows, the government today said it will soon reduce tax on interest payments on overseas borrowings to 5% from the present 20%.

"The withholding tax would be liberalised as announced in the 2012-13 Budget," Joint Secretary in the Finance Ministry Thomas Mathew told reporters.

He said the modalities are being formalised by the legislative department in the Law Ministry.

In his Budget speech, Finance Minister Pranab Mukherjee had proposed to reduce the rate of withholding tax on interest payments on external commercial borrowings (ECB) from 20% to 5% for three years.

This, he had said, was aimed at providing low cost funds to stressed infrastructure sectors -- power; airlines; roads and bridges; ports and shipyards; affordable housing; fertilizer; and dams.

Amid high interest rates in the domestic market, low cost ECBs have emerged as an important source of credit for the corporate India.

The borrowings under this route increased to $34.4 billion in the last fiscal from 18.06 billion five years ago. In the first two months of 2012-13, the overseas borrowings totalled $5.97 billion.