Budget cheers issuers/investors with concessional withholding tax

MUMBAI: Indian companies seeking foreign debt will likely see its cost of capital fall amidst a rise in overseas investor interest after the Union Budget extended a concessional 5% withholding tax on these papers for the next three years.

“I propose to extend it (the concession) to 30.6.2020. This benefit is also extended to Rupee-denominated (Masala) Bonds,” Finance Minister Arun Jaitley said in its Budget speech.

Interest paid to a non-resident on foreign currency borrowing is subject to withholding tax. In case of rupee-denominated bonds, borrowers bear the tax levy, while investors also have the liability in some instances. A concessional withholding rate of 5% is being charged on interest earned by foreign entities in external commercial borrowings or in bonds and Government securities.

According to Sapan Gupta, National Practice Head, Banking & Finance, Shardul Amarchand Mangaldas & Co. the extension of the concessional withholding tax rate on rupee denominated bonds may act in favour of borrowers, leading to a likely reduction in borrowing costs.

“We may see more issuances,” Gupta said.

"It is proposed to exempt capital gains arising out of transfer of a rupee denominated bond by a non-resident to a non-resident," said Jaitley.