Lowering withholding tax not enough to cheer up companies

The government’s decision to cut withholding tax on interest payments by Indian companies on long-term infrastructure foreign currency bonds from 20 per cent to five per cent hasn’t really cheered markets.

“Only top-rated infrastructure companies would be able to benefit from this, as external commercial borrowing (ECB) guidelines cap the cost for such borrowing at 500 basis points above the six-month Libor (London interbank offered rate),” said a senior executive at ICICI Securities. “Unless ECB guidelines are relaxed, the benefit of the guidelines would be very limited,” he added.

“I agree ECB price caps apply,” said D Saradhi Rajan, managing director (debt capital markets) at Bank of America-Merrill Lynch. He estimates there are about 15 large companies that meet the definition of ‘infrastructure’.

 

The infrastructure sector is defined as one that accounts for power, telecommunication, railways, roads, bridges, sea ports and airports, industrial parks, urban infrastructure (water supply, sanitation and sewage projects), mining, exploration and refining and cold storage or cold room facilities, including those for farm-level pre-cooling, preservation or storage of agricultural and allied produce, and marine products and meat.

Companies don’t require a specific approval to avail of the reduced withholding tax rate; the government has pre-approved it, provided ECB guidelines for the cost ceiling and end uses are met by the borrowers concerned.