Govt reintroduces clause on 5% withholding tax for FPIs

The Finance Ministry has reintroduced the clause in the Income tax act that provided for preferential 5% withholding tax applicable to foreign portfolio investors (FPIs). As a part of amendments to the Finance Bill 2021 introduced in Lok Sabha on 22 March, the government has put back the deleted clause of Section 151 which referred to the five per cent withholding tax rate for FPIs in case of interest earned from debt securities.

ET reported last week that the potential withholding tax on offshore funds could shoot up to as much as 20% after a provision in Section 151 of the Income Tax Act was deleted while government was making changes to the Income Tax Act. However, last week the government clarified that there was no change in the policy and FPIs could avail the beneficial withholding tax rate through another section of the Income tax act (Section 194LD).

“Last week’s clarification helped in providing some interim relief, but the reintroduction of the said proviso will put to rest all the concerns of offshore funds,” said a tax expert.

Several foreign funds had lobbied with the Finance Ministry for reintroduction of the provision. In the Income Tax act, Section 194LD too talks about the 5% tax rate, however tax experts on a standalone basis the section was not legally sufficient and hence had requested for the provision to be reintroduced.

FPIs are big-ticket investors in the Indian debt market owning assets worth more than Rs 4 lakh crore, depositories data showed. Withholding tax is a tax that is deducted by the creditor before paying interest to foreign bond investors.