To attract foreign investors, Govt considers cut in withholding tax, Pg1

Key Highlights:

• The government and RBI are considering cutting or eliminating the withholding tax on government bonds to attract foreign investment.
• Currently, non-residents pay about 20% withholding tax on interest from Indian government bonds, after a concessional rate of 5% ended in 2023.
• Prime Minister Modi has appealed to citizens to conserve foreign exchange by reducing gold purchases and foreign travel.
• In February 2026, net foreign direct investment saw a near four-year high of $4.6 billion following a trade deal between India and the US.

Detailed Insights:

• Discussions among policymakers involve whether cutting the withholding tax will increase investment given high US interest rates and global economic threats.
• In 2013, the RBI introduced a Foreign Currency Non-Resident (Bank) deposit swap window, raising $26 billion to boost forex reserves during a rupee crisis.
• Some officials suggest prioritizing austerity measures and forex conservation over cutting taxes to manage the economic situation.
• The RBI sharply increased foreign exchange market interventions in 2024-25, selling $399 billion, but reduced intervention in 2025-26.
• The rupee has weakened by 11% against the US dollar, and foreign portfolio investors have withdrawn about $22.5 billion in 2026.
• Some Asian economies like Malaysia exempt government bonds from withholding tax, while China has a temporary exemption since 2018.

Key Concepts Involved:

• Withholding Tax: Tax deducted from interest income paid to foreign investors on bond holdings.
• Foreign Exchange Reserves: A country's holdings of foreign currencies used to back its liabilities.
• Foreign Direct Investment (FDI): An investment made by a firm or individual in one country into business interests located in another country.