New Delhi: Moving ahead with steps to revive investor sentiment and curb demand for gold, Finance Minister P Chidambaram on Friday cut withholding tax on overseas borrowings to 5 percent from 20 percent 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 percent seeks to lower the cost of foreign borrowings by the Indian companies.

The RGESS, Mr. 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 Mr. 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 companies, 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 overseas borrowings, Mr. 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 percent instead of 20 percent.

The Rajiv Gandhi Equity Scheme would be open to retail investors who would be investing in equity markets for the first time. The scheme would have a total lock-in period of three years, including an initial blanket one year lock-in when trading will not be possible.

“The maximum investment permissible under the scheme is up to Rs. 50,000 and the investor would get a 50 percent deduction of the amount invested from the taxable income for that year,” Chidambaram said.

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

Besides, Chidambaram also allowed domestic companies to access cheaper funds from abroad and lowered tax on overseas borrowings.

The reduced tax will apply to funds borrowed between July 1, 2012 and June 30, 2015, Mr. Chidambaram said.

“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 that 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 that 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.

(Agencies)

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