FinMin may reduce withholding tax for FIIs to boost corp bonds

To spur foreign investment in the corporate bond market, the Finance Ministry has proposed reduction in withholding tax for FIIs to 5%, from 20% at present.

As the ministry braces up for a new minister after the BJP government is sworn in this evening, the capital markets division would also make a case for deepening the currency derivatives market and make it easier for FIIs to hedge risks.

These suggestions will be placed before the new minister who is to assume office tomorrow.

In a note prepared for the new government, the ministry has proposed cutting withholding tax for FIIs in non- infrastructure corporate bonds to 5%, thus favouring uniform withholding tax for all FIIs investing in corporate bonds.

"The withholding tax for FIIs in non-infrastructure bond issuance by companies is 20%, which may be brought down to 5%," said a Finance Ministry official.

Last year, the government had cut the withholding tax rate on foreign investment in infrastructure corporate bonds to 5% for two years from 20%.

"We want to create a level-playing field for foreign investors in corporate bond market," the official added.

As part of amendments to the Finance Bill 2013, outgoing Finance Minister P Chidambaram had then said that 5% tax rate would apply to interest payments to FIIs and qualified foreign investors between June 1, 2013 and May 31, 2015 on government securities and rupee-denominated corporate bonds.

The FII investment limit in corporate debt is $51 billion and till now only 33.7% has been utilised, leaving enough headroom for FIIs to invest.

On deepening the currency derivative market, the official said the finance ministry is engaged with the Reserve Bank, and a final decision would only be taken by the RBI.

"We want to open up currency derivative market for both domestic and foreign players. Also we want to make it easier for FIIs to take position in the market," the official said.

In its monetary policy statement for 2014-15 on April 1, the RBI had said it was finalising the modalities for allowing FIIs to hedge their currency risk by using exchange traded currency futures.

The central bank also proposed to allow resident individuals, firms and companies with actual foreign exchange exposures to book foreign exchange derivative contracts up to $250,000 on declaration, subject to certain conditions.