The government will bring down the tax on interest payments to foreigners on government and corporate debt to 5 per cent from up to 20 per cent at present, for a two-year period, as it looks for ways to bridge the widening current account deficit through inflows of foreign capital.
The proposal to lower withholding tax on infrastructure bonds would now be extended to government debt and infrastructure bonds, finance minister P Chidambaram announced while moving amendments to his budget proposals.
The cut will be effective from 1 June 2013 to 31 May 2015, he said.
The reduction in tax on debt investments meets a long-term demand of foreigners while at the same time helping the government to boost inflows of foreign capital to bridge its current account deficit.
The finance minister also softened his earlier stance on residency proof saying that a tax residency certificate issued by a foreign government would be accepted as proof of residency for tax purposes.
Earlier, in his budget proposals for 2013-14, the finance minister had stated that a tax residency certificate "shall be necessary but not a sufficient condition" to take advantage of double taxation avoidance agreements, which created confusion among foreign investors.
Chidambaram, a strong advocate of a liberalised investment regime, had earlier relaxed ownership limits for the foreign investors by allowing them to hold up to $25 billion in government bonds and $51 billion in corporate bonds at any given time.
Foreigners have invested more than $11 billion in Indian equities and nearly $3 billion in debt so far this year.