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India Won't Cut Withholding Tax On Govt Bonds: Official

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The government has no plan to reduce withholding tax for foreign investors on government bonds as demand for these bonds are strong, a senior finance ministry official said on Thursday.

Bond dealers have been expecting the government to reduce such taxes to boost foreign fund inflows into India.

Some sell-off took place in government bonds after the official's comments. The second-most traded bond, 8.79 per cent 2021, had gone up marginally to 8.3416 per cent from 8.3267 per cent before the news.  Withholding tax is a tax levied on incomes such as interests and dividends from securities owned by non-residents.

"Withholding tax is one of the key reasons why the foreign institutional investor (FII) auction is not getting good response," a trader with a foreign bank told Reuters.

"I have to pay a withholding tax for the full six months even if I buy a bond with a half-yearly coupon in August," the trader added.

India's debt limit auction on Wednesday met tepid investor response due to investment restrictions in the auctioned limits and because of thin participation by some investors on account of a US holiday.

However, the government will reduce withholding tax from 20 per cent to 5 per cent on foreign investment in long-term infrastructure bonds and on external commercial borrowings in certain sectors like power, airline, roadways among others, the official said.

"We will not do this (reduce withholding tax) with government bonds as there is already enough demand for that. If there is demand for my products I will in fact raise prices," the official said.

Foreign investors pay withholding tax of as much as 20 per cent, depending on the tax treaty India holds with the corresponding country. A similar tax is applicable in many countries, including Indonesia and South Korea.

While Prime Minister Manmohan Singh is yet to take call on GAAR amendments, removal of withholding tax was expected to increase return on bond investment.

Lack of corp bond liquidity limits market for key issuers and government debt is considered the best credit to trade in.

Earlier, on Wednesday, rupee has traded at 54.36/38 after rising as high as 54.18 earlier, its strongest since May 17.

That rise had been sparked after Bloomberg-UTV report reported the government may remove the withholding tax on bonds for foreign investors, without citing sources.

The rupee recovered marginally on Thursday after breaching the 55-level against the dollar, but was still down 41 paise on good demand for the American currency from banks and importers.

The dollar strengthened against other currencies as well in the overseas market.

The rupee resumed trading lower at 54.80 per dollar as against the last closing level of 54.49 at the Interbank Foreign Exchange (Forex) Market and dropped further to 55.05.

However, it recovered afterwards to 54.90 per dollar at 1100 hrs on mild selling of dollars.

On Thursday, economic affairs secretary R. Gopalan said India still has some scope to reduce government borrowings. He was speaking on the sidelines of the Reserve Bank of India's board meeting.

"We are trying to see if we can reduce it...we still think that, I mean, there is some scope for reduction," Gopalan said.

The Indian government plans to raise Rs 5.69 trillion through market borrowings in the fiscal year 2012-13 that started on April 1.

There were media reports on Thursday that the finance ministry is expected to reduce the government's market borrowing by about 90 billion rupees in the April-September period.