Withholding tax on foreign loans cut to 5%

The finance ministry on Friday said it has reduced tax on interest paid by companies for foreign borrowings to five per cent from 20 per cent.

The ministry also gave approval to all borrowings fulfilling certain conditions, in an effort to reduce the time lag in seeking approvals for such loans. Earlier, it had said approval would be given on case-to-case basis. The move would benefit companies looking to tap cheaper funds from abroad.

Finance Minister P Chidambaram told reporters: “Instead of case-to-case approval, we have laid down general conditions. Anyone satisfying general conditions need not come to the government for case to case approval.” He said the step was taken to encourage overseas borrowing as the rates were extremely low abroad.

The Finance Act, 2012, had provided that interest income of a non-resident investor would be taxed at the reduced rate of five per cent. Thus, the Indian company, while paying interest on money borrowed in foreign currency, would be required to withhold tax at five 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 it usually takes about two to three weeks to seek approval for such borrowings.

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 issue should be for the infrastructure sector as defined by the Reserve Bank of India under its external commercial borrowing regulation.