Chidambaram cuts tax on foreign borrowings, clears RGESS

Continuing the slew of reforms initiated by the UPA government, Finance Minister P Chidambaram today cut the withholding tax on overseas borrowings to 5% from 20% and approved the Rajiv Gandhi Equity Scheme to attract more investment and supress demand for gold.

"The Rajiv Gandhi Equity Savings Scheme will encourage more first time retail investors to invest in the stock market. Secondly the easing of tax is to encourage overseas borrowing. Interest rates are low abroad and these low cost funds can come to India," Chidambaram told reporters here.

The stock market responded positively to the announcement with the BSE Sensex closing 404 points higher at 18,752.83.

These decisions, which aim at improving sentiments in stock market, come within days of government taking tough measures like raising diesel prices by over Rs5 a litre and allowing foreign direct investment in multi-brand retail.

The Rajiv Gandhi Equity Savings scheme (RGESS), which was announced in budget in March, would provide a 50% tax deduction on investments up to Rs 50,000 to investors whose annual taxable income is below Rs10 lakh.

These investors can put in money through the mutual funds and exchange traded funds and the investments would be locked-in for a total of three years.

"It will act as alternative financial instrument and encourage more people to invest in this instrument rather than gold, which is a dead instrument", Chidambaram said.

The scheme would cover stocks listed under BSE 100, CNX 100 and Navratna, Maharatna and Miniratna public sector firms.

Investors can also invest in follow-on-public offer (FPO) of such PSUs and initial public offering (IPO) of PSUs with turnover more than Rs4,000 crore, a move which is expected to give a push to the government's disinvestment drive.

The Centre aims to raise Rs30,000 crore from minority stake sale in PSUs in the current fiscal. However, with six months already over, no company has yet hit the market.

Chidambaram said, the RGESS "not only encourages the flow of savings and improves the depth of domestic capital markets, but also aims to promote an 'equity culture' in India. This is also expected to widen the retail investor base in the Indian securities markets".

The Department of Revenue would soon notify the scheme and market regulator SEBI will issue relevant circulars to operationalise it in two weeks.

As in case of post office savings scheme and insurance policies, Chidambaram said "this tax break for direct investment in equity is expected to substantially encourage the retail participation in securities market as well as enhance their participation in the growth of Indian industry".

As regards reduction of withholding tax on oveseas borrowings, Chidambaram said that appropriate amendments would be made in the Income Tax Act, 1961, under which the interest income of a non-resident investor will be taxed at reduced rate of 5% instead of 20%.

The reduced tax will apply to funds borrowed between July 1, 2012 and June 30, 2015, Chidambaram said, adding this would enable domestic companies to access cheaper funds from abroad as the tax on overseas borrowings has been lowered.

"It is to encourage overseas borrowings. Interest rates are low abroad and these low cost funds can come to India," Chidambaram said.

He further said the guidelines would have some generic conditions which if the corporates satisfy will enable them to directly access the overseas market for raising funds.

"Anyone satisfying general conditions need not come to government for case by case approval," Chidambaram said, adding the borrowings could be done in the form of loan agreement or by way of long term infrastructure bonds that comply with External Commercial Borrowings (ECB) regulations.