Foreign holders of infra debt eligible for withholding tax benefits from 1 June: finmin

Foreign holders of infrastructure debt in India will be eligible for lower withholding tax on interest income accrued between 1 June 2013 and 31 May 2015, irrespective of the time of purchase of the bonds, the finance ministry has clarified.

The finance ministry was clarifying on investor doubts whether the reduction in withholding tax is effective on all interest earned or only for debt bought between 1 June 2013 and 31 May 2014.

The finance minister had, in his budget for the 2011-12 financial year proposed to reduce the rate of withholding tax on interest payments on the borrowings of infrastructure debt funds (IDF) from 20 per cent to 5 per cent, in order to attract investors.

Subsequently, in the 2012-13 budget, the government introduced section 194 LC in the Income Tax Act to reduce the rate of WHT from 20 per cent to 5 per cent in respect of interest paid on money borrowed in foreign currency from a source outside India in a period of three years, ie, 1 July 2012 to 30 June 2015 under a loan agreement and by way of long term infrastructure bonds issued in foreign currency

The ministry also said foreign investors would not have to obtain a tax identity card known as the Permanent Account Number (PAN) to benefit from reduced withholding tax on long-term infrastructure bonds.

The government expects the reduction in rates and simplification of the withholding tax norms to encourage greater subscription in Indian debt securities by foreign investors and encourage development of the Indian debt market.