India Considers Cutting Withholding Tax to Attract Foreign Investors

The Indian government and the Reserve Bank of India are considering reducing or eliminating the withholding tax on interest income from government bonds held by foreign investors. Currently, non-residents pay approximately 20%, one of the highest rates globally, following the expiration of a concessional 5% rate in 2023. This potential policy shift aims to attract foreign capital inflows, conserve foreign exchange reserves, and stabilize the rupee amid depletion of $38 billion in reserves over two months and ongoing geopolitical tensions in West Asia. While Prime Minister Narendra Modi has urged citizens to adopt austerity measures to save foreign exchange, policymakers debate whether tax cuts alone will suffice given high US interest rates and macroeconomic threats. Internal discussions also explored special foreign deposit schemes, reminiscent of 2013 measures, but these were ultimately rejected. Officials remain concerned that removing the tax might not guarantee increased investment and could expose India to scrutiny if other austerity measures, such as fuel price hikes, are not implemented. The move seeks to align India’s tax framework with competitors like China, Vietnam, and Malaysia to enhance market attractiveness.