FM: More measures to attract capital inflows on the anvil, Pg13

Key Highlights:

• Finance Minister Nirmala Sitharaman announced that India will implement more measures to attract foreign capital inflows.
• This follows a recent coordinated package by the government and the Reserve Bank of India (RBI) to address foreign portfolio investor sell-offs and stabilize the rupee.
• The recent measures included scrapping the 20% withholding tax on interest income from government bonds.
• The 12.5% Long-Term Capital Gains (LTCG) tax on foreign bond holdings was also removed through an Ordinance.
• The government is considering further steps, including boosting foreign investments in equities and potentially reducing the Liberalised Remittance Scheme (LRS) limit.

Detailed Insights:

• The announced measures aim to counter persistent Foreign Portfolio Investor (FPI) outflows and alleviate Balance of Payments (BoP) pressures.
• The removal of withholding tax on bond income is intended as a first step, with similar incentives hinted for the equity market.
• Discussions are underway to potentially reduce the Long-Term Capital Gains (LTCG) tax on equities to make them more attractive to foreign investors.
• A proposed reduction in the annual Liberalised Remittance Scheme (LRS) limit from $250,000 is being considered to curb capital outflows.
• These policy adjustments are crucial for enhancing India's financial market stability and supporting economic growth.

Key Concepts Involved:

• Foreign Portfolio Investment (FPI): Investments by foreign entities in financial assets like stocks and bonds without acquiring management control.
• Balance of Payments (BoP): A systematic record of all economic transactions between a country's residents and the rest of the world over a specific period.
• Withholding Tax: A tax deducted at the source of an income payment made to a non-resident individual or company.
• Long-Term Capital Gains (LTCG) Tax: A tax levied on profits from the sale of capital assets held for more than a specified period.
• Liberalised Remittance Scheme (LRS): An RBI scheme allowing resident individuals to remit up to a certain amount abroad per financial year for permissible transactions.