The Union Cabinet, headed by Prime Minister Narendra Modi, has recommended an ordinance to ease tax rules for foreign investors in certain categories of securities. The proposal, moved by the finance ministry, is aimed at making Indian financial markets more attractive to overseas investors. Details of the ordinance were not immediately available.
The move comes amid sustained pressure on the Indian rupee, which has weakened about 6 per cent against the US dollar. Foreign portfolio investors (FPIs) have also remained net sellers of Indian equities, pulling out a record Rs 2.25 lakh crore from domestic stock markets since January.
Market participants view the proposed tax relief as part of broader efforts by the government to attract foreign capital, support financial markets and ease pressure on the currency.
Further details regarding the categories of securities covered under the proposal and the extent of the tax concessions are awaited.
The proposed tax relief measures are expected to complement steps likely to be announced by the Reserve Bank of India (RBI) following the conclusion of the Monetary Policy Committee’s meeting on Friday. The MPC began its three-day deliberations on Wednesday.
The report said the government is simultaneously working on a broader set of measures aimed at addressing concerns across sectors of the economy. These reportedly include a government-backed credit facility for businesses, support measures for exporters and other policy interventions.
Policymakers have been increasingly focused on the rupee’s weakness and persistent foreign portfolio investor (FPI) outflows, both of which have weighed on market sentiment.
Currently, foreign investors are subject to a 20 per cent withholding tax on interest earned from government bonds. Prior to July 1, 2023, the applicable tax rate was 5 per cent for income generated from government securities, state development loans and rupee-denominated bonds.
Ahead of the Union Budget, FPI representatives had urged the government to revisit several tax provisions, including the capital gains tax framework for listed securities. They also sought the removal of what they described as dual taxation through the simultaneous imposition of capital gains tax and securities transaction tax.
According to a Bloomberg report citing people with knowledge of the matter, the central government is considering a series of measures to attract greater foreign investment into its debt market, including a sharp reduction in taxes on overseas investors and easing investment restrictions on government bonds.
The report comes at a time when the rupee has come under pressure from foreign fund outflows, elevated oil prices and global trade uncertainties.
