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Core cos borrowing abroad for power play to get tax sop
December, 05th 2007
In a move aimed at facilitating cheaper credit for the infrastructure sector, the government is considering a proposal to scrap withholding tax on overseas borrowings by infrastructure companies and financial institutions servicing the power sector. The proposal, if implemented, could reduce overseas borrowing costs by up to 20%. The move intends to reduce the cost of power generation. An announcement in this regard may be made in Budget 2008.

Withholding tax is levied on interest payments on overseas borrowings. Depending on the lenders domicile, the tax rate could be as high as 20%. The tax is intended to counteract tax evasion and avoidance either by domestic or international taxpayers.

The power ministry has proposed that the sector be exempted from withholding tax as well as tax on interest and other payments made to non-residents or a foreign company.

The power sector requires investments of over Rs 10,00,000 crore in the 11th Plan (2007-12). This money cant be raised only in the domestic market. Overseas funds would also have to be tapped. Moreover, since the main aim of the government is to provide cheap and reliable power to consumers, the attractiveness of low-cost overseas borrowings would have to be maintained by scrapping the withholding tax, an official source said.

As withholding tax is deducted from the lenders payment, it jacks up the overall cost of funds. Cheap overseas funds, coming in at just over Libor rates, lose their cost advantage because of taxes.

The power ministry has also favoured withdrawal of the tax in the interest of consumers. With power projects being awarded on the basis of tariff-based bidding now, low cost of funds would have a major bearing on reducing the power tariff for consumers, the source said. The proposal would free funds worth Rs 52,500 crore during 11th Plan from withholding tax. This amount is expected to be raised in the overseas market by both public and private sector projects.

The demand to scrap withholding tax for the infrastructure sector has been a long-pending demand of the industry.

The finance ministry had turned down a similar proposal last year. This years proposal is also likely to face some opposition as it could disturb the governments plan to check liquidity growth to prevent rupees runaway appreciation. Already, RBI has imposed curbs on ECBs to prevent excess liquidity.
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