Excluding non-banking financial companies (NBFC) from restriction on interest deductibility – Budget 2023
Section 94B of the Act provides restriction on deduction of interest expense in respect of any debt issued by a non-resident, being an associated enterprise of the borrower. It applies to an Indian company, or a permanent establishment of a foreign company in India, who is a borrower. If such person incurs any expenditure by way of interest or of similar nature exceeding one crore rupees which is deductible in computing income chargeable under the head “Profits and gains of business or profession”, the interest deductible shall be restricted to the extent of 30% of its earnings before interest, taxes, depreciation and amortisation (EBITDA). Proviso to this section brings within its scope certain debt issued by a lender who may not be an associated enterprise of the borrower.
2. This section was inserted in the Act vide Finance Act, 2017 in order to implement the measures recommended in final report on Action Plan 4 of the Base Erosion and Profit Shifting (BEPS) project under the aegis of G-20 – OECD countries to address the issue of base erosion and profit shifting by way of excess interest deductions.
3. Sub-section (3) of this section excludes certain companies that are engaged in the business of banking or insurance from its scope.
4. Representations have been received stating that certain Non- Banking Financial Companies [NBFCs] which are engaged in the business of financing should also be excluded from the scope of this section as they are undertaking the similar functions and are now being subject to similar regulations and compliances in respect of those functions.
5. In view of the above, it is proposed to amend sub-section (3) of section 94B of the Act to provide a carve out to certain class of NBFCs and to provide that nothing contained in sub-section (1) of section 94B of the Act shall apply to,-
(i) an Indian company or a permanent establishment of a foreign company which is engaged in the business of banking or insurance; or
(ii) such class of non-banking financial companies as may be notified by the Central Government in the Official Gazette in this behalf;
6. It is also proposed to provide that for the purposes of this section, “non-banking financial company” shall have the same meaning as assigned to it in clause (vii) of the Explanation to clause (viia) of sub-section (1) of section 36 of the Act.
7. This amendment will take effect from 1st April, 2024 and will accordingly apply to assessment year 2024-25 and subsequent assessment years.
[Clause 47]
Extract of relevant clause of Finance Bill 2023
Clause 47 of the Bill seeks to amend section 94B of the Income-tax Act relating to limitation on interest deduction in certain cases.
The said section, inter alia, provides that notwithstanding anything contained in the Act, where an Indian company, or a permanent establishment of a foreign company in India, being the borrower, incurs any expenditure by way of interest or of similar nature exceeding one crore rupees which is deductible in computing income chargeable under the head “Profits and gains of business or profession” in respect of any debt issued by a non-resident, being an associated enterprise of such borrower, the interest deductible in computation of income under the said head shall be restricted only to the extent of thirty per cent., of its earnings before interest, taxes, depreciation and amortisation or interest paid or payable to associated enterprise, whichever is less.
It is proposed to amend sub-section (3) of the said section so as to provide that the provision of said section shall not apply to such class of non-banking financial companies as may be notified by the Central Government in the Official Gazette in this behalf.
It is further proposed to define the expression “non-banking financial company”.
These amendments will take effect from 1st April, 2024 and will, accordingly, apply in relation to the assessment year 2024-2025 and subsequent assessment years.
Extract of Relevant Amendment Proposed by Finance Bill, 2023
47. Amendment of section 94B.
In section 94B of the Income-tax Act, with effect from the 1st day of April 2024,–
(i) in sub-section (3), after the words “banking or insurance”, the words “or such class of non-banking financial companies as may be notified by the Central Government in the Official Gazette in this behalf” shall be inserted;
(ii) in sub-section (5), after clause (ii), the following clause shall be inserted, namely:–
‘(iia) “non-banking financial company” shall have the meaning assigned to it in clause (vii) of the Explanation to clause (viia) of sub-section (1) of section 36;’.
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