India to Cut Tax on Rupee Debt to Attract Foreign Investment

India will cut a levy on foreign investment in rupee-denominated government and corporate bonds to attract overseas capital and narrow the nation’s current-account deficit.

In a speech in parliament today, Finance Minister Palaniappan Chidambaram proposed the so-called withholding tax, charged on interest income, be reduced to 5 percent from 20 percent for foreign and qualified institutional investors. The change will be applicable for two years starting June, he said.

The rupee surged the most in two weeks after Chidambaram’s decision to ease the tax rules. The measures may lure foreign investors, who are restricted to $75 billion of Indian debt, and help finance the current account gap, said Jayesh Mehta, managing director at the Indian unit of Bank of America Corp. The shortfall in the widest measure of trade touched a record $32.6 billion in the quarter ended Dec. 31.

“This measure is similar to the opening of the Indian equity markets in the nineties,” Mehta, who’s also the country treasurer at the local unit of Bank of America, said in a phone interview today. “I expect that by December, the $75 billion limit for foreign holdings in government and corporate debt will be filled up.”

The Indian currency closed 0.8 percent higher at 53.81 against the dollar in Mumbai, making it the best performer in Asia today, according to data compiled by Bloomberg.

Indian debt returned 5.75 percent in 2013, compared with 2.9 percent on Chinese notes and 2.53 percent on Russian bonds, according to indexes compiled by JPMorgan Chase & Co. Brazilian securities lost 1.52 percent, the data show.

Ease Inflation

“Reducing withholding tax on rupee bonds of Indian corporates and government securities will attract overseas lenders to put in more debt investments in India,” said Prabal Banerji, chief financial officer at Adani Power Ltd., based in the western Indian city of Ahmedabad. “This will help ease inflation and keep the exchange rate steady.”

Overseas investors bought $3.3 billion of government and corporate debt so far in 2013, compared with $6.86 billion last year, according to data compiled by Bloomberg. Indian companies sold 792 billion rupees ($14.7 billion) of bonds in 2013, about 5 percent more than in the same period of 2012, the data show.

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