In a move to enable low-cost foreign borrowing by Indian companies, the finance ministry today said interest paid on such borrowings would be taxed at a lower rate of 5 per cent against the existing rate of 20 per cent. To reduce the time lag in seeking approval for such borrowings, the ministry gave approval to all borrowings. Earlier it had said approval would be given on case to case basis.
“Instead of case-to-case approval we have laid down general conditions. So anyone fulfilling those conditions does not have to come to the government,” Finance Minister P Chidambaram told reporters. He said the step was taken to encourage overseas borrowing as rates were low abroad.
Finance Act 2012 had provided that interest income of a non-resident investor would be taxed at the reduced rate of 5 per cent. Thus the Indian company while paying interest on money borrowed in foreign currency would be required to withhold tax at 5 per cent and not 20 per cent. The relief has been provided on borrowings made during July 2012 to June 2015.
With a view to lower the compliance burden and reduce the time lag which would arise on account of case-by-case approval, the government has decided to grant approval to all borrowings by way of loan agreement and long-term infrastructure bonds that satisfy certain conditions,” the finance ministry said in a statement.
A finance ministry official said usually it takes about two to three weeks to seek approval for such borrowings, but with this relaxation a company can directly go for overseas borrowing taking advantage of lower rates.
For availing the tax benefit, the finance ministry has laid down conditions that in case of long-term infrastructure bonds the end use of the proceeds of such bond issue should be for the infrastructure sector as defined by the Reserve Bank of India under its External Commercial Borrowings regulation.