The government’s announcement to lower withholding tax to 5% from 20% on interest payments by Indian companies on long-term infrastructure bonds in foreign currency has not really cheered the markets.
“Only the top rated infrastructure companies would be able to benefit from this as the external commercial borrowing (ECB) guidelines caps the cost for such borrowing to 500 basis points above six months Libor (London Interbank Offered Rate),” said a senior executive at ICICI Securities.
“Unless the ECB guidelines are relaxed, the benefit of the guidelines will be very limited,” he said.
“Agree that the ECB price caps apply,” said D Saradhi Rajan the managing director (debt capital markets) at Bank of America – Merrill Lynch, a global investment bank. As per his estimates there are still about 15 large companies that meet the infrastructure definition and will meet the price cap.
The infrastructure sector is defined as power, telecommunication, railways, roads including bridges, sea port and airport, industrial parks, urban infrastructure (water supply, sanitation and sewage projects), mining, exploration and refining and cold storage or cold room facility, including for farm level pre-cooling, for preservation or storage of agricultural and allied produce, marine products and meat.
No specific approval is required for a company to utilise this reduced withholding tax rate and the government has given a pre-approval provided the ECB guidelines for the cost ceiling and end uses are met by the relevant borrower.
