No extension to lower withholding tax triggers concern among FPIs: Report

New Delhi, February 3, 2023 

Foreign portfolio investors (FPIs) are concerned that they may face a higher withholding tax after the current concessional tax rate regime ends by the end of June, The Economic Times reported Friday.

Finance Minister Nirmala Sitharaman did not announce any extension to concessional tax rate, which is effective till June 30, in the Budget.

Currently, FPIs investing in government securities and corporate bonds avail concessional 5 per cent withholding tax rate. Without extension, the withholding tax rate would shoot up to 20 per cent, the report said.

The withholding tax rate applies on the interest earned by the FPIs on government securities and rupee-denominated bonds of Indian companies. According to the depository data update till December 31 last year, FPIs own debt securities to the tune of Rs 2.4 trillion in India.

“The Finance Bill has not proposed an extension on the concessional withholding tax rate and, accordingly, the interest income earned by FPIs on or after July 1, 2023 shall be chargeable to tax at the rate of 20 per cent plus applicable surcharge and cess,” Suresh Swamy, partner, Price Waterhouse & Co, told ET.

While some of the FPIs will be eligible to claim treaty benefits to avoid the 20 per cent tax rate, such an exercise would be subject to compliance with General Anti-Avoidance Rules (GAAR).

“The foreign investor community was hoping that the benefit of 5 per cent TDS rate on interest income from government securities, corporate and foreign currency bonds would be extended beyond June 2023,” Rajesh Gandhi, partner, Deloitte India, told the publication.

“Since no extension has been proposed, going forward, tax on interest income will increase significantly to 20% unless the investor can claim a lower rate under tax treaties,” he added.

[The Business Standard]