Circular No 07/2012 – CBDT allows general permission for the reduced tax withholding on interest in relation to foreign currency borrowings under section 194LC of the Income-tax Act, 1961 (“Act”)

Background

Provision for (concessional) tax withholding in relation to foreign currency borrowings was introduced in the Finance Act, 2012 by way of inserting section 194LC in the Act, wef July 1, 2012.  The amendment was introduced with the

objective of promoting low cost of borrowings for the Indian companies, in case of borrowings made in foreign currency during the period beginning from July 1, 2012 to July 30, 2015 subsequently, section 115A of the Act was amended wef July 1, 2012 to restrict the tax liability of the non-resident lender consistent with the concessional rate of tax withholding prescribed.

As per section 194LC, any person responsible for paying interest to foreign companies/ non-residents is required to withhold tax on such interest payment at the rate of 5 percent[1] [and not @ 20 percent, as was applicable earlier in respect of interest payments on debt incurred by an Indian company in foreign currency] subject to following conditions being met cumulatively:

·          Payer is an Indian company;

·          Interest is payable in respect of monies borrowed in foreign currency during the period July 1, 2012 to June 30, 2015, from a source outside India;

·          Such borrowings are made under a loan agreement or by way of issue of long-term infrastructure bonds;

·          Such loan agreement, or issue of long-term infrastructure bonds, as the case may be, has been approved by Central Government; and

·          The amount of interest as does not exceed the interest calculated at the rate approved by the Central Government, having regard to the terms of the loan or the bond and its repayment. 

Clarifications provided in the Circular:

Considering the fact that there would be a large number of cases of foreign borrowings/ bond issues to be undertaken by Indian companies, and that a case-by-case approval mechanism would entail avoidable compliance burden on the borrower/ issuer of bonds, the CBDT[2] has issued Circular No 07/ 2012 granting a general permission for reduced tax withholding, to borrowing arrangements fulfilling specified conditions.

A.     Conditions specified in relation to agreements for loan

·          Borrowing of money should be under a loan agreement.

·          Monies borrowed under the loan agreement should comply with section 6(3)(d) of the Foreign Exchange Management Act, 1999 read with Notification No FEMA 3/2000-RB viz Foreign Exchange Management (Borrowing or Lending in Foreign exchange) Regulations 2000, dated May 3, 2000, as amended from time to time, (hereafter referred to as “ECB regulations”), either under the automatic route or under the approval route.

·          Payer should obtain a Loan Registration Number (“LRN”) issued by the Reserve Bank of India (“RBI”) in respect of the agreement.

·          No part of the borrowing (under the said agreement) should have taken place before July 1, 2012.

·          Loan agreement should not be restructuring of an existing agreement for borrowing in foreign currency solely for taking benefit of reduced withholding tax rates.

·          End use of funds and other conditions, as laid out by the RBI under ECB regulations, should be followed during the entire term of the loan agreement under which the borrowing has been made.

B.     Conditions specified in relation to issue of bonds

·          Bond issue should be authorized under ECB regulations, either under the automatic route or under the approval route.

·          LRN should have been obtained from the RBI in relation to the bond issue.

·          ‘Long-term’ means that the bond to be issued should have original maturity term of at least three years.

·          Proceeds of bond issue should be utilized in the ‘infrastructure sector’ only.

·          ‘Infrastructure sector’ shall have same meaning as assigned under ECB regulations. 

·          As per ECB regulations, ‘Infrastructure sector’ is defined as power, telecommunication, railways, road including bridges, sea port and airport, industrial parks, urban infrastructure (water supply, sanitation and sewage projects), mining, exploration and refining  and cold storage or cold room facility (including for farm level pre-cooling, for preservation or storage of agricultural and allied produce, marine products and meat).

C.    Conditions specified in relation to rate of interest

·          Approved rate of interest for the purpose of section 194LC of the Act shall be any rate of interest falling within the ‘All-in-cost’ ceilings specified by the RBI under ECB regulations, as is  applicable to the borrowing by loan agreement/ bond issue, as the case may be, having regard to the tenure thereof.

·          ‘All-in-cost’ ceilings are reviewed from time to time; following ‘all-in-cost’ ceilings are applicable upto September 30, 2012:

Minimum average maturity period	All-in-cost ceilings over 6 month LIBOR
Three years and up to five years	350 basis points
More than 5 years	500 basis points

·          In case of long-term infrastructure bonds not covered under ECB regulations, the approval, for purpose of section 194LC shall be on case to case basis.  The Indian company, for the purpose of obtaining the necessary approval under section 194LC in respect of such long-term bond issue, should apply in writing to Member (IT), CBDT with the relevant details of the purpose, period and rate of interest.