GCCI seeks 5% withholding tax for FPIs in proposed I-T Act

Ahmedabad: Warning that a high 20% withholding tax is weakening India’s edge in global debt markets, the Gujarat Chamber of Commerce & Industry (GCCI) has urged the Central Board of Direct Taxes (CBDT) and the Union finance ministry to immediately restore the 5% tax regime for foreign portfolio investors (FPIs) investing in govt securities and specified rupee-denominated bonds under the proposed Income Tax Act, 2025. The apex trade body argued that the current 20% tax rate dampens India’s appeal to global bond investors at a crucial time of international market integration.

In its representation, GCCI said the earlier concessional rate under Section 194LD of the Income-Tax Act, 1961 expired in July 2023, after which the withholding tax on such interest income reverted to 20%. According to the chamber, the higher rate has weakened India’s appeal for global bond investors at a time when the country is seeking deeper integration with international financial markets and stronger foreign participation in sovereign and debt markets.

GCCI direct tax committee chairman Jainik Vakil said, “A globally competitive tax framework is necessary to attract stable long-term capital, improve liquidity in debt markets and support forex stability.” GCCI has asked the CBDT to permanently institutionalise the 5% withholding tax rate instead of relying on temporary sunset-based provisions.

The chamber has also recommended widening the concessional regime to cover AAA-rated corporate bonds, infrastructure bonds and other strategically important debt instruments to deepen foreign participation in India’s corporate bond market. It further called for simplification and digitisation of the Double Taxation Avoidance Agreement relief claim process for FPIs to reduce compliance hurdles and improve ease of investment.

As an interim step, GCCI has sought immediate relief through a circular, notification or administrative clarification restoring the 5% withholding tax rate until the new law is enacted. It has also proposed concessional treatment or exemptions for sovereign wealth funds, pension funds, multilateral institutions and other long-term strategic investors.

Vakil added, “India stands at a crucial stage in the development of its bond markets, and a competitive 5% withholding tax regime for FPIs is essential to align our tax policy with global standards, boost investor confidence and channel long-term foreign capital into government and high-quality debt securities.”