Government Approves Ordinance to Ease Tax Rules for Certain Foreign Investors

Government Seeks to Ease Tax Rules for Foreign Investors

The Union Cabinet has recommended an ordinance to ease tax rules for foreign investors in certain categories of securities, according to a report by the Times of India. The proposal, moved by the finance ministry, aims to provide relief to foreign investors who have been pulling out a record Rs 2.25 lakh from Indian equities since January, when the rupee weakened 6 percent against the US dollar.

The reported tax relief proposal is part of broader policy efforts to address pressure on the rupee and sustained foreign investor outflows from domestic markets. The move is likely to be coordinated with the Reserve Bank of India, which is expected to announce measures on Friday after the Monetary Policy Committee meeting, which began on Wednesday.

The government has also been seeking to address concerns raised by various sectors through other policy steps, including a government-guaranteed credit line for businesses, a package for exporters, and adjustments in duties, including fuel, to shield the economy from the impact of the West Asia war. The rupee's decline and continued FPI withdrawals have emerged as key areas of concern for policymakers.

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Foreign investors currently pay a withholding tax, or tax deducted at source, of 20 percent on interest income from government bonds. Until July 1, 2023, the rate stood at 5 percent on income from government securities, state development loans, and rupee-denominated bonds.

Tax experts have cited that the government has increased long-term and short-term capital gains tax while also levying securities transaction tax, making investments in India less attractive. The proposed ordinance, if notified, would mark another step in the government's attempt to respond to concerns around foreign investor participation at a time of currency weakness, market outflows, and external pressure from the West Asia conflict.