Withholding tax on FPI debt return may surge to 20 percent

Sunil Badala, Partner and Head (financial services, tax) at KPMG in India, said the government had in September 2020 amended Section 115AD of Income Tax Act to accord a concessional income tax rate of 10 per cent on specified income to funds set up in the International Financial Services Centre (IFSC).

"While amending Section 115AD, it seems that the provision providing for concessional income tax rate of 5 per cent on specified interest to foreign portfolio investors (FPIs) has been inadvertently omitted," Badala said.

"Given that the withholding tax section (Section 194LD) which is in effect until June 30, 2023 has not been amended, coupled with the fact that the government has not specifically indicated about curtailing the sunset date for lower income tax rate of 5 per cent on specified interest earned by FPIs, we believe that the inadvertent error should be rectified to provide taxability and withholding tax at 5 per cent," he added.

The error will impact at least 4,000 international funds.