JULY 22, 2014

By Samir S Shah, Deloitte Haskins & Sells LLP

INDIAN corporate sector faces challenges in terms of slow regulatory approvals, high cost of borrowings and slowing demand. The Finance Bill, 2014 has proposed to provide a relief to the corporate world by reducing the cost of borrowing.

The Finance Act, 2012 introduced Section 194LC in the Income-tax Act which provided that an Indian company can apply concessional rate of withholding tax of 5 per cent on the interest payable in respect of foreign borrowings. The lower rate of withholding tax was applicable for monies borrowed in foreign currency for the period from 1 July 2012 to 1 July 2015. It was subject to the following conditions:

a. Monies should be borrowed under a loan agreement or by way of issue of long-term infrastructure bonds as approved by the Central Government; and

b. Interest payable should be as per the rate approved by the Central Government.

Subsequently, in order to mitigate the compliance burden and hardship, the CBDT had issued a Circular No. 07/2012, dated 21 September 2012 prescribing the conditions to be satisfied for not obtaining any specific approval from the Central Government. Conditions specified for Bond issue were:

a. The bond issue by the Indian company should be authorized under ECB regulations either under the automatic route or under the approval route.

b. The bond issue should have a loan Registration Number issued by the RBI.

c. The term "long term" means that the bond to be issued should have original maturity term of three years or more.

d. The bond issue proceeds should be utilized in the "infrastructure sector" only.

e. The term "infrastructure sector" shall have same meaning as is assigned to it by RBI under the ECB regulations.

The Finance Bill 2014 has proposed to extend the benefit of concessional rate of withholding tax to any long-term bond and not restricted to long term infrastructure bond. However, in line with the proposal, CBDT should come out with the clarification that the above Circular will continue to apply to the long term bonds proposed to be included in section 194LC by the Finance Bill 2014.

The Finance Bill 2014 has also proposed to extend the period of borrowings from 1 July 2015 to 1 July 2017. The provisions of section 206AA providing for higher rate of withholding tax in the absence of Permanent Account Number will not be applicable to interest payable on long term bonds.

The Finance Bill 2014 has proposed to extend benefit of concessional rate of withholding tax on interest on monies borrowed under a loan agreement and interest on bonds to business trust also. The business trust is defined to mean a trust registered as an Infrastructure Investment Trust or a Real Estate Investment Trust, the units of which are required to be listed on a recognized stock exchange, in accordance with the regulations made under the Securities Exchange Board of India Act, 1992 and notified by the Central Government.

The above measures proposed in the Finance Bill 2014 are welcome steps and are in right direction to reduce the cost of borrowings and make Indian corporates more competitive.