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 per cent from 20 per cent 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 per cent seeks to lower the cost of foreign borrowings by the Indian companies.
The RGESS, 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 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 compaies, 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 oveseas borrowings, 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 per cent instead of 20 per cent.