CBDT may take measures to correct withholding tax anomaly for FPIs

The CBDT is expected to rectify the same either in the Finance Bill or the I-T Act

The government is expected to maintain a status quo on the withholding tax for foreign portfolio investors (FPIs) on the interest they earn on rupee-denominated bonds, currently at 5 per cent, going into the next financial year.

An amendment last year through Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020 had inadvertently deleted the special provision for the concessional withholding rate for FPIs on the interest they earn on rupee-denominated bonds issued by Indian firms and government securities. The Central Board of Direct Taxes (CBDT), however, is expected to rectify the same either in the Finance Bill or the I-T Act, said people in the know.

"The issue has been brought to the notice of CBDT, which has admitted to it being an oversight and given assurances of getting it rectified in time," said a tax consultant who deals with FPIs.

The government had introduced the lower withholding tax rate in 2013 after a crash in the rupee led to a flight of foreign money. These were applicable on interest payable until May 31, 2015. Record FPI inflows in the debt segment in 2014 prompted the Centre to extend these concessions twice in subsequent years.

Last year's Budget had extended the concessional rate of tax under Section 194LD of the I-T Act until June 30, 2023.

"The reference to Section 194LD was omitted by mistake, which would have come to the notice of tax authorities by now. But it's a not serious issue as the Section 194LD is till there and the oversight may be corrected through the Finance Bill," said another tax expert.

Experts believe that the lower tax rate is a significant contributor towards making India’s debt market attractive to overseas investors. The concessional rate has also helped reduce borrowing costs for the government and firms.

FPIs have been net sellers in the debt market in FY21, with net sales to the tune of $6.7 billion till March 9.