Introduction of new section 194LD to provide concessional rate of TDS in respect of interest income of a non-resident from rupee-denominated bonds or government securities consequent to the amendment in section 206AA

The Finance Act, 2012 had amended section 115A to provide that Interest payable by an Indian company to a foreign company or a non-corporate non-resident in respect of borrowing made in foreign currency from sources outside India between 1.7.2012 and 30.6.2015 would be subject to tax at a concessional rate of 5% on gross interest (as against the rate of 20% of gross interest applicable in respect of other interest received by a non-corporate non-resident or foreign company from Government or an Indian concern on money borrowed or debt incurred by it in foreign currency).

To avail this concessional rate, the borrowing should be from a source outside India under a loan agreement or by way of issue of long-term infrastructure bonds approved by the Central Government. Such interest paid by an Indian company to a non-corporate non-resident or a foreign company would be subject to TDS@5% under section 194LC.

For enabling subscription by a non-resident in the long term infrastructure bonds issued by an Indian company in India (rupee denominated bond), a proviso was proposed to be inserted in section 194LC(2) by the Finance Bill, 2013 to provide that where a non-resident deposits foreign currency in a designated bank account and such money as converted in rupees is utilized for subscription to a long-term infrastructure bond issue of an Indian company, then, for the purpose of this section, the borrowing by the company shall be deemed to be in foreign currency.

Accordingly, as per the above proposal, tax would be deducted at the lower rate of 5% in respect of interest income arising to the non-resident from such rupee denominated long-term infrastructure bonds provided the conditions specified in the section are fulfilled.

In order to exempt non-residents and foreign companies from the applicability of higher rate of TDS on account of non-furnishing of PAN, it is now proposed that the provisions of section 206AA would not be made applicable to TDS under section 194LC.

Therefore, for providing a concessional rate of TDS in respect of interest income arising from rupee denominated bonds or government securities, a separate section 194LD is proposed to be inserted. This section provides for concessional rate of TDS in respect of interest on such bonds and government securities payable to FIIs and QFIs during the period from 1.6.2013 to 31.5.2015.   It may be noted that the provisions of section 206AA would be applicable in respect of TDS under section 194LD.

Consequential amendments are proposed to be made in section 115A providing for taxability of certain income of, inter alia, foreign companies and section 195 providing for deduction of tax at source in respect of payments to, inter alia, foreign companies.

Likewise, consequential amendments are also proposed to be made in section 115AD providing for taxability of certain income of FIIs and section 196D providing for deduction of tax at source in respect of income payable to FIIs.

Related Amendment  to Finance Bill 2013  which presented in Lok sabha on 28.02.2013 and as passed by Lok Sabha on 30.04.2013

15. Page 22, for lines 28 to 42, substitute-

’43. After section 194LC of the Income tax Act with effect from the 1st day of June, 2013, the following section shall be inserted namely:-

Insertion of new section 194ID- Income by way of interest on certain bonds and Government Securities

   “194LD. (I) Any person who is responsible for paying to a person being a Foreign Institutional Investor or a Qualified Foreign Investor any income by way of interest referred to in sub-section (2), shall, at the time of credit of such income to the account of the payee or at the time of payment of such income in cash or by the issue of a cheque or draft or by any other mode. whichever is earlier deduct income-tax thereon at the rate of five per cent.

(2) The income by way of interest referred to in sub section (1) shall be the interest payable on or after the 1st day of June, 2013 but before the 1st day of June, 2015 in respect of investment made by the payee in

(i) a rupee denominated bond of an Indian company or

(ii) a Government security:

Provided that the rate of interest in respect of bond referred to in clause (i) shall not exceed the rate as may be notified by the Central Government in this behalf’

Explanation- For the purpose of this section-

(a) “Foreign Institutional Investor” shall have the meaning assigned to it in clause (a) of the Explanation to section 115AD:

(b) “Government security” shall have the meaning assigned to it in clause (b) of section 2 of the Securities Contracts (Regulation) Act, 1956(42 of 1956).

(c) “Qualified Foreign Investor” shall have the meaning assigned to it in the Circular, No. Cir/IMD/DF/14/2011, dated the 9th August, 2011, as amended from time to time, issued by the Securities and Exchange Board of lndia, under section 11 of the Securities and Exchange Board of India Act, 1992’ (15 of 1992)

16. Page 22, after line 42 insert-  

43A (New)-Amendment of Section 195

“43A. In section 195 of the Income-tax Act, in sub-section (I ), after the word, figures and letters “section 194LC”, the words, figures and letters “or section 194LD” shall be inserted with effect from the 1st day of June, 2013,

17. Page 22, after line 42, insert-

43B (New)-Amendment of Section 196D

   43B. In section 196D of the income-tax Act, in sub-section (I ), for the words, brackets, letters and figures “any income in respect of securities referred to in clause (a) of sub-section (I ) of section 115AD is payable”, the words, brackets, letters and figures “any income in respect of securities referred to in clause (a) of sub-section (I) of section 115AD, not being income by way of interest referred to in section 194LD is payable” shall be substituted with effect from the ist day of June, 2013;

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