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PC Announces Steps To Boost Investments

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Moving ahead with steps to revive investor sentiment and curb demand for gold, India's Finance Minister P Chidambaram on 21 September cut withholding tax on overseas borrowings to 5 per cent from 20 per cent and approved the Rajiv Gandhi Equity Savings Scheme (RGESS).

While the RGESS is aimed at encouraging first time retail investors to invest in stock markets through tax concessions, the cut in withholding tax to 5 per cent seeks to lower the cost of foreign borrowings by the Indian companies.

The RGESS, Chidambaram said, will "give tax benefits to new investors who invest up to Rs 50,000 and whose annual income is below Rs 10 lakh.

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

The scheme was announced by the then finance minister Pranab Mukherjee in his 2012-13 budget speech.

According to Chidambaram, "the scheme 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".

Besides the equities of blue chip private and public sector compaies, he said, the investors under the scheme would also be permitted to invest through Mutual Funds and listed Exchange Traded Funds (ETFs).

As regards the 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 per cent instead of 20 per cent.
Interest rates are among the highest in India among big economies, and both industry and the government have been calling for a reduction in the cost of borrowing to revive growth in Asia's third largest economy.

Last week the government announced opening up of the country's vast supermarket sector as well as the airlines industries to foreign direct investment.

Withholding tax of 20 per cent added roughly 70 to 100 basis points to the cost of an overseas loan, so cutting that to 5 per cent lowers the cost of borrowing by 50 to 80 bps, he said.

"Funding-starved sectors like capital goods, infrastructure companies, road developers should benefit," said Sandip Sabharwal, chief executive officer for portfolio management services at Prabhudas Lilladher.

The reduced tax will apply to funds borrowed between July 2012 and June 2015, finance minister P. Chidambaram told reporters.

Also on 21 September, India implemented the Rajiv Gandhi Equity Savings scheme, which was first announced in the budget in March and promises tax incentive for first-time investors. The programme will include mutual funds and exchange-traded funds.

Some financial stocks also rallied on hopes India will increase the foreign direct investment limit in insurance companies from the current 26 per cent to 49 per cent, although such a move would need parliamentary approval.

That could prove difficult as the government faces heavy opposition to its moves to open up supermarkets and raise the price of subsidised diesel.