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Interest on withheld ECBs may be taxed
January, 19th 2008
That moderating capital flows into the country is expected to top the agenda for Budget 2008-09 is clear from the finance ministrys plans to tax the interest earned on external commercial borrowings (ECBs).

This would make foreign debt more expensive and help moderate the surplus on the capital accountexpected to touch $103 billion in this fiscal, against an initial estimate of $58 billion. ECBs were the largest component of this.

Sources said the government has been considering the tax for quite some time. In the meantime, it had resorted to sterilisation of excess capital inflows. However, high domestic interest rates continue to make India an attractive and lucrative destination for global capital funds.

The government feels the forthcoming Budget, just a few weeks way, would be a good time to announce the decision on the proposed tax.

Even the Prime Ministers Economic Advisory Council review of the economy has acknowledged the need to limit the flow of ECBs. Since the pressure on the rupee to appreciate is likely to continue in the immediate future, clear signals should be given to the Indian industry to make adjustments through productivity increases and to tap the booming domestic market, it said.

Companies have to park their ECB funds abroad until they are ready to use them for the specific projects for which the money have been raised. The finance ministry now proposes to tax the interest that accrues as interest on this sum.

Commenting on the possible levy, Mukesh Butani, partner, BMR& Co, said, This can be a short-term measure, the aim of which will obviously not be to garner resources. But the government, while imposing such a tax, must spell out the important milestones on the achievement of which this tax will be withdrawn.

Arvind Virmani, chief economic adviser in the finance ministry, has also recommended imposing a tax on the interest paid on ECBs and auctioning such debt.

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