Section
(S.) 194LC was introduced in the Indian Tax Laws by Finance Act 2012 to provide
for a reduced rate of withholding tax (@ 5%[1]) on payment of
interest by an Indian company to a nonresident in respect of borrowings in
foreign currency made between July 2012 and June 2015 by way of loan agreement
or issue of long term “infrastructure” bonds, subject to certain conditions
including specific approval of the Government of India (GOI).
Pursuant to the above, with a view to lower compliance burden and reduce the time lag on GOI approval on a case-to-case basis, the Central Board of Direct Taxes (CBDT) had issued Circular No. 7 of 2012 [2](old Circular) enlisting conditions which, if fulfilled, qualifies the borrowing/bonds for automatic route/general approval of the GOI for availing benefit of concessional rate.
Finance (No.2) Act (FA) 2014 further amended S.194LC with effect from 1 October 2014 to liberalize the benefit and extended the concessional rate to (a) foreign currency borrowings under loan agreement till 30 June 2017; (b) long-term bonds of any sector (including “infrastructure”) issued between October 2014 and June 2017 and (c) borrowings made by Business Trust (viz. Real Estate Investment Trust or an Infrastructure Investment Trust).
Pursuant to above, the CBDT has issued Circular No. 15 of 2014[3] (new Circular) modifying old Circular and enlisting conditions for automatic approval of long term bonds. The new Circular does not lay down similar conditions for borrowings by Business Trust for which case-to-case approval will be necessary.
The new Circular was anticipated by the taxpayers pursuant to amendments to S.194LC made by FA 2014. In substance, the new Circular merely reiterates the conditions laid down in old Circular and the changes are consequential to changes in the parent provisions of S.194LC.
Due to liberalization of S.194LC to long term bonds of any sector (and not necessarily infrastructure sector), Indian companies now have opportunity of availing debt financing at lower tax cost. The terms of such issue (including rate of interest and end-use[4 will need to be compliant with extant exchange control regulations on external commercial borrowings (viz. ECB regulations) for availing automatic approval under S.194LC.
The benefit of new Circular cannot be availed by Business Trusts who will need to obtain case-by-case approval from GOI for availing benefit of concessional withholding rate on interest on foreign currency borrowings.
[1]Plus applicable surcharge and cess
[2]Dated 21 September 2012 (Refer EY Tax Alert dated 24 September 2012)
[3]Dated 17 October 2014
No comments:
Post a Comment