We want to create a level-playing field for foreign investors  in corporate bond market. Non- infrastructure bond issuance attracts 20% withholding tax right now, which may be brought down to 5%” – a Finance ministry official

New Delhi : To spur foreign investment in the corporate bond market, the Finance Ministry has proposed reduction in withholding tax for FIIs to 5 per cent, from 20 per cent at present, reports PTI.

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 views will be placed before the new minister today.

 In a note prepared for the new government, the ministry has proposed cutting withholding tax for FIIs in non- infrastructure corporate bonds to 5 per cent, 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 per cent, which may be brought down to 5 per cent,” said a Finance Ministry official.

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

 “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 per cent 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 USD 51 billion and till now only 33.7% has been utilised, leaving enough headroom for FIIs to invest.  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.

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