Budget woos foreign investors with tax incentives

By Himank Sharma and Suvashree Choudhury

MUMBAI (Reuters) - India, keen to rekindle economic growth, wooed foreign investors on Saturday with a budget that delayed controversial rules to target tax avoidance and maintained lower taxes on income from debt investments.

The measures, part of the government's budget for the next fiscal year, come amid growing concerns about foreign investors pulling cash out of India and other emerging markets should the U.S. Federal Reserve start raising interest rates this year.

Among headline measures, India deferred a controversial General Anti Avoidance Rule (GAAR) by two years. Initially set to be come into effect this year, the change tightens rules for foreign investors who are registered in countries with double taxation exemption agreements with India.

India also extended a concessionary rate of 5 percent for so-called withholding taxes on debt investments by foreign investors by two years, until July 1, 2017. India had cut the tax on income from debt investments to 5 percent from 20 percent in 2013.

"The measures announced for offshore investors will help in improving capital inflows as the overall fundamentals of the economy improve," said Ashish Parthasarathy, treasurer at HDFC Bank.

Foreign flows are critical for India, which in 2013 suffered its worst market turmoil since the balance of payment crisis of 1991, when comments by then Fed Chairman Ben Bernanke sparked a so-called "taper tantrum" that hit emerging markets.

However, India has rebounded, with a net $51.6 billion in investments into shares and debt since the start of 2014, on the back of easing inflation and bets on an improving economy.

Finance Minister Arun Jaitley said India would give tax breaks to foreign fund managers who want to set up India-domiciled funds. Foreign fund managers had typically preferred to invest in the country through funds domiciled in countries with a lower tax rate.

India also said it would allow domestic alternative investment funds (AIFs) to accept foreign investments.

(Editing by Rafael Nam and Stephen Powell)