Start-ups, some NBFCs demand exemption from thin capital provisions

Experts say start-ups have low Ebitda initially and debt is raw material for NBFCs' biz requirements

As the Finance Bill came up for debate in the Lok Sabha on Tuesday, start-ups and some non-banking financial companies (NBFCs) demanded an exemption from a provision of the draft legislation. According to the provision, income tax deduction is denied to those companies whose interest payment on overseas debt to associated enterprises exceeded 30% of their earnings before interest, taxes, depreciation and amortisation (Ebitda).

Banks and insurance companies have already been exempted from the Budget proposal, technically called a provision on thin capital incorporated in the Bill following an action plan by the Organisation for Economic Co-operation and Development (OECD) on Base Erosion and Profit Shifting (BEPS). 

Eric Mehta, partner-transfer pricing, Price Waterhouse, said start-ups should be given exemption from this proposal as they have very low Ebitda in the initial years. Also, NBFCs should be out of this, in line with banking and insurance companies, he said. 

Sanjay Agarwal, managing director, Au Financiers India Limited, a Jaipur-based NBFC, said financing companies should be looked at differently, including all NBFCs, as for them getting debt is raw material for their business requirements and interest would always be substantially higher than 30% of their Ebitda. 

At the same time, he said, these transactions by Indian units with their non-resident associates through branches or subsidiaries or in any other capacities must be on an arm’s length basis with prevailing market conditions and positions. 

Manish Sinha, founder of Skrilo, said: “India is a fertile ground for start-ups and innovation over the long term and it is imperative that the government supports them with tax benefits.” Early-stage capital was much needed for growing businesses than meeting financial burdens, he said.

Vaibhav Dabhade, co-founder & CEO, Anchanto, an e-commerce logistics and selling platform, said: “While Anchanto India is not an entity serviced through an overseas debt, we do understand the implications of this clause. Every business chases the dream of getting profitable, which takes time — more so for start-ups — wherein they are trying to disrupt the current scheme of things."

Indian start-ups, many of whom have foreign venture capital funding and are looking to raise the next round of capital, would look at this clause as an additional pressure on their Ebitda, he cautioned. The initial period of any such disruptor was, and should be, spent on acquiring customers and hence Ebitda would already be under squeeze. "We hope that just like the banks and insurance companies, even start-ups get at least a time-bound exemption period," he said.

Amarjeet Singh, partner-tax, KPMG in India, said the thin capitalisation provision was a specific anti-avoidance measure aimed at companies which reduce their corporate tax outlay by putting debt in a business in excess of their need and requirement.  

While the main purpose, he said, was to tackle companies which misuse the capital gearing, start-ups have become collateral damage. Further, the disallowance is only if debt is taken from a related party shareholder.  

He, however, pointed out that in principle, the start-ups can be exempted from this provision but having said that, the impact of this provision is not very intense on start-ups (which are loss-making initially), as disallowed interest deduction could be carried forward for eight years.

Demand for exemption

* Start-ups and NBFCs want a breather from a specific provision in the Finance Bill, which denies income tax deduction to certain companies

* The provision on thin capital denies the I-T deduction to firms whose interest payments on overseas debt to associated firms exceeds 30% of Ebitda; banks and insurance companies are exempted from this provision

* Experts say start-ups have low Ebitda in initial years, while getting debt is raw material for NBFCs’ business requirements