{"id":103638,"date":"2026-05-16T11:31:23","date_gmt":"2026-05-16T06:01:23","guid":{"rendered":"https:\/\/vajiramandravi.com\/current-affairs\/?p=103638"},"modified":"2026-05-16T11:31:23","modified_gmt":"2026-05-16T06:01:23","slug":"withholding-tax-cut-centres-new-push-to-attract-foreign-capital-to-india","status":"publish","type":"post","link":"https:\/\/vajiramandravi.com\/current-affairs\/withholding-tax-cut-centres-new-push-to-attract-foreign-capital-to-india\/","title":{"rendered":"Withholding Tax Cut: Centre\u2019s New Push to Attract Foreign Capital to India"},"content":{"rendered":"<h2><b>Withholding Tax Latest News<\/b><\/h2>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">India is considering <\/span><b>reducing the withholding tax<\/b><span style=\"font-weight: 400;\"> on foreign investors\u2019 earnings from Indian bonds from 20% to 5% to attract overseas capital inflows.\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">The move comes as India\u2019s foreign exchange reserves have declined sharply amid the West Asia conflict and rising crude oil prices, increasing external economic pressure.\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Lowering this tax is aimed at making Indian bonds more attractive to foreign investors and strengthening capital inflows as part of broader efforts to manage the external sector and conserve foreign exchange.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Reducing the withholding tax could increase foreign investors\u2019 net returns, make Indian debt instruments more attractive, encourage greater capital inflows, and help support India\u2019s foreign exchange reserves during global uncertainty.<\/span><\/li>\n<\/ul>\n<h2><b>About Withholding Tax<\/b><\/h2>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Withholding tax (WHT) is a tax collected <\/span><b>at the source of income<\/b><span style=\"font-weight: 400;\">.\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Instead of waiting for the taxpayer to pay at the end of the financial year, the payer deducts a portion of the income before transferring it to the recipient and deposits that amount directly with the government.\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">It applies to income earned through <\/span><b>employment, investments, royalties, and other sources<\/b><span style=\"font-weight: 400;\">, ensuring advance tax collection.<\/span><\/li>\n<\/ul>\n<h2><b>Evolution of India\u2019s Withholding Tax Regime<\/b><\/h2>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Expiry of the Concessional Rate<\/b><span style=\"font-weight: 400;\"> &#8211; India had introduced a concessional <\/span><b>5%<\/b><span style=\"font-weight: 400;\"> withholding tax on interest earned by foreign investors from investments in government securities and certain rupee-denominated bonds under <\/span><b>Section 194LD of the Income Tax Act<\/b><span style=\"font-weight: 400;\">.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Tax Rate Hike After July 2023<\/b><span style=\"font-weight: 400;\"> &#8211; The concessional regime expired in July 2023, after which the effective withholding tax for many foreign investors reverted to around <\/span><b>20%,<\/b><span style=\"font-weight: 400;\"> making Indian debt relatively less attractive for global bond investors.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Impact on Foreign Capital Inflows<\/b><span style=\"font-weight: 400;\"> &#8211; The higher tax burden reduced the appeal of Indian debt instruments at a time when India was seeking stronger foreign capital inflows and inclusion in global bond indices.<\/span><\/li>\n<\/ul>\n<h3><b>Historical Evolution in Other Areas\u00a0<\/b><\/h3>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">India\u2019s withholding tax regime has changed significantly over time. In 1976, withholding tax on royalties paid to non-residents was 40%, while fees for technical services attracted 20%.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Between 1986 and 2005, the government reduced withholding tax on royalties and technical services to 10% to lower technology acquisition costs and encourage foreign collaboration.<\/span><\/li>\n<\/ul>\n<h2><b>Impact of Withholding Tax Cut on Foreign Portfolio Investors (FPIs)<\/b><\/h2>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Higher Post-Tax Returns<\/b><span style=\"font-weight: 400;\"> &#8211; Withholding tax reduces FPIs\u2019 effective yields because tax is deducted before investment income is paid. Lowering the tax would improve post-tax returns and overall investment gains.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Better Compounding and Reinvestment<\/b><span style=\"font-weight: 400;\"> &#8211; A high withholding tax reduces the amount available for immediate reinvestment, weakening the benefits of long-term compounding. A lower tax rate would free up more capital for reinvestment.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Improved Liquidity for Global Investors<\/b><span style=\"font-weight: 400;\"> &#8211; For large international investors, withholding tax can temporarily lock up funds until tax credits or refunds are processed, creating short-term liquidity pressures. Lower taxes would ease this constraint.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Reduced Compliance Burden<\/b><span style=\"font-weight: 400;\"> &#8211; FPIs often face administrative difficulties in claiming tax relief under Double Taxation Avoidance Agreements (DTAAs). A lower withholding tax would reduce compliance costs and regulatory friction.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Greater Market Attractiveness<\/b><span style=\"font-weight: 400;\"> &#8211; By lowering transaction costs and improving risk-adjusted returns, a reduced withholding tax would make Indian financial markets more attractive to overseas investors.<\/span><\/li>\n<\/ul>\n<h2><b>Withholding Tax Practices Across Countries<\/b><\/h2>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Most countries impose withholding tax on foreign investors, particularly on passive income such as interest, dividends, and royalties.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">The tax rate, coverage, and exemptions vary depending on the country, investor category, and the presence of a <\/span><b>Double Taxation Avoidance Agreement (DTAA)<\/b><span style=\"font-weight: 400;\">.<\/span>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><span style=\"font-weight: 400;\">United States: 30%<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><span style=\"font-weight: 400;\">Germany: 26.4%<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><span style=\"font-weight: 400;\">France: 25%<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><span style=\"font-weight: 400;\">China: 10%<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><span style=\"font-weight: 400;\">Hong Kong: No withholding tax<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><span style=\"font-weight: 400;\">Singapore: No withholding tax<\/span><\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<h2><b>FPI Investment in India\u2019s Government Debt<\/b><\/h2>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">FPI hold a relatively small share of India\u2019s government debt market, though their participation has increased significantly following India\u2019s inclusion in global bond indices such as the JPMorgan Government Bond Index-Emerging Market.\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">The RBI has capped FPI investment in government securities at 6% of the outstanding stock.\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">By March 2025, FPI investment in dated government securities had risen sharply by 43.2%, increasing from $30.6 billion to $43.9 billion year-on-year.<\/span><\/li>\n<\/ul>\n<h2><b>Why There Are Demands to Cut Withholding Tax<\/b><\/h2>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>High Tax Reduces India\u2019s Attractiveness<\/b><span style=\"font-weight: 400;\"> &#8211; Analysts argue that India\u2019s 20% withholding tax on interest income makes Indian debt less attractive compared to many peer countries, reducing foreign investor interest.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Barrier to Global Bond Index Inclusion<\/b><span style=\"font-weight: 400;\"> &#8211; High taxation and procedural hurdles delayed India\u2019s inclusion in major global bond indices. Lower taxes and simpler processes could significantly boost foreign capital inflows.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Potential for Large Capital Inflows<\/b><span style=\"font-weight: 400;\"> &#8211; Experts estimate that greater tax clarity or exemptions could bring $45\u201350 billion in inflows over two years, while also attracting pension funds and endowment investors.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Global Competition<\/b><span style=\"font-weight: 400;\"> &#8211; Several countries do not tax bond investments, while countries like China offered special tax exemptions after bond index inclusion to attract foreign investors, making India comparatively less competitive.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Recent FPI Debt Outflows<\/b><span style=\"font-weight: 400;\"> &#8211; After the concessional withholding tax regime ended in 2023, foreign investors faced higher tax costs. As a result, India\u2019s debt market has recently seen FPI outflows, indicating weaker investor sentiment.<\/span><\/li>\n<\/ul>\n<p><b>Source:<\/b> <strong><a href=\"https:\/\/indianexpress.com\/article\/explained\/explained-economics\/india-withholding-tax-cut-fpi-foreign-investors-forex-inflows-10690880\/\" target=\"_blank\" rel=\"nofollow noopener\">IE<\/a><\/strong><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Withholding tax cut may help India attract foreign capital, boost FPI inflows, strengthen forex reserves, and improve the appeal of Indian debt markets.<\/p>\n","protected":false},"author":18,"featured_media":103654,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[18],"tags":[60,22,59,7554],"class_list":{"0":"post-103638","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-upsc-mains-current-affairs","8":"tag-mains-articles","9":"tag-upsc-current-affairs","10":"tag-upsc-mains-current-affairs-tag","11":"tag-withholding-tax","12":"no-featured-image-padding"},"acf":[],"_links":{"self":[{"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/posts\/103638","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/users\/18"}],"replies":[{"embeddable":true,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/comments?post=103638"}],"version-history":[{"count":4,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/posts\/103638\/revisions"}],"predecessor-version":[{"id":103661,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/posts\/103638\/revisions\/103661"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/media\/103654"}],"wp:attachment":[{"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/media?parent=103638"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/categories?post=103638"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/tags?post=103638"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}