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Lower withholding tax on ECB may have to wait
October, 03rd 2011

DEA presses firms case on infra funds; CBDT says tax sops a problem in FY12

Lowering of the 20 per cent withholding tax rate on the interest paid for external commercial borrowings (ECBs) may have to wait, due to the pressure on direct tax collections.

While deciding on steps to further relax ECB norms last month, the department of economic affairs (DEA) referred this demand of companies to the department of revenue. The specific proposal is to exempt the tax on interest payable for ECBs of a maturity of at least five years.

A senior Central Board of Direct Taxes official told Business Standard it would be very difficult to agree on any reduction in the tax rate for any area, given the pressure on direct tax collections this year.

Net direct tax collection in the financial year up to September 15 saw an increase of only 6.7 per cent, at Rs 1,27,858 crore, as against Rs 1,19,849 crore collected from April 1 to September 15 last year.

Said a DEA official: We are consulting the revenue department on this issue. They will come with their point of view and then we will discuss all aspects of the matter.

He said ECBs were an important component for financing the huge requirement of the infrastructure sector and a final decision in this regard would be taken by finance minister Pranab Mukherjee.

Explaining the position on taxation of interest on ECBs, Himanshu Parekh, executive director of KPMG, said: Interest on any borrowing in foreign currency payable by an Indian concern to a non-resident attracts tax withholding @ 20 per cent (plus surcharge) under the Income Tax Act. The withholding tax rate could be lower under the various Double Tax Avoidance Agreements entered into by India.

The government, keeping in mind the infrastructure sectors requirements, has substantially relaxed the norms on ECBs by companies in recent months. In the backdrop of rising interest rates, a high-level committee decided on September 15 to allow companies to raise cheaper funds abroad to refinance their rupee loans.

It permitted Chinas renminbi as an acceptable currency for the first time under ECBs, with an overall ceiling of $1 billion. And, to increase the limit for these borrowings under the automatic route to $750 million from the current $500 mn. Such ECBs, where a company can raise money without seeking the regulators approval, would have a maturity of a least five years.

Though the committee left the overall annual permissible ECB limit of $30 bn (raised from $20 bn in May) unchanged, as only $15.13 bn from this route had been used so far this year, economic affairs secretary R Gopalan said additional ECB for the infrastructure sector could be considered, above this limit.

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