Amendment of section 194LC of the Act to extend the period of concessional rate of withholding tax and also to provide for the concessional rate to bonds listed in stock exchanges in IFSC.

Section 194LC of the Act, provided for a concessional rate of Tax Deductible at Source (TDS) at five per cent by a specified company or a business trust, on interest paid to non-residents on the following forms of borrowings (approved by the Central Government) made in foreign currency from sources outside India:

i. Monies borrowed under a loan agreement at any time on or after 1st July, 2012 and before 1st July, 2020;

ii. Borrowings by way of issue of any long-term infrastructure bond at any time on or after 1st July, 2012 and before 1st July, 2014;

iii. Borrowings by way of issue of long-term bond including long-term infrastructure bonds at any time on or after 1st of October 2014 and before 1st July, 2020;

The concessional rate of TDS of five per cent is also applicable in respect of monies borrowed by a specified company or a business trust from a source outside India by way of issue of rupee denominated bond (RDB) before 1st July, 2020, to the extent such interest does not exceed the amount of interest calculated at the rate approved by the Central Government in this behalf. Representations have been received for extension of the time limit and also for a further concessional rate of TDS on interest payment against borrowings through issues of long-term bonds and RDB which are listed only on a recognised stock exchange in any IFSC.

In order to attract fresh investment, create jobs and stimulate the economy, it is proposed to; –

i. extend the period of said concessional rate of TDS of five per cent to 1st July, 2023 from 1st July, 2020;

ii. provide that the rate of TDS shall be four per cent on the interest payable to a non-resident, in respect of monies borrowed in foreign currency from a source outside India, by way of issue of any long term bond or RDB on or after 1st April, 2020 but before 1st July, 2023 and which is listed only on a recognised stock exchange located in any IFSC.

This amendment will take effect from 1st April, 2020.

[Clause 82]

Extract of Relevant Clauses of Finance Bill, 2020

Clause 82

Clause 82 seeks to amend section 194LC of the Income-tax Act relating to income by way of interest from Indian company.

Sub-section (1) of the said section provides that income-tax at the rate of five per cent. shall be deducted on any interest referred to in sub-section (2), payable by a specified company or business trust to a non-resident, in respect of monies borrowed in foreign currency from a source outside India.

It is proposed to insert a proviso in sub-section (1) of the said section so as to provide that the withholding tax of four per cent. shall be deducted on interest referred to in clause (ib) of sub-section (2) of said section.

Sub-section (2) of said section specifies the interest which is eligible for withholding tax of five per cent. on borrowings made under a loan agreement at any time on or after the 1st day of July, 2012 but before the 1st day of July, 2020, through issue of long-term infrastructure bond at any time on or after the 1st day of July, 2012 but before the 1st day of October, 2014, through any long-term bond including long-term infrastructure bond at any time on or after 1st day of October, 2014 but before the 1st day of July, 2020 or by way of issue of rupee denominated bonds before the 1st day of July, 2020 subject to the approval of the Central Government.

It is proposed to amend said sub-section (2) so as to extend the period of rate of withholding tax of five per cent. on the interest payments against borrowing made under a loan agreement, issue of long-term bonds including infrastructure bonds and issue of rupee denominated bonds from the 1st day of July, 2020 to the 1st day of July, 2023.

It is also proposed to insert a new clause (ib) in sub­section (2) of the said section so as to extend the withholding tax of four per cent. on the interest payable to a non­-resident, in respect of monies borrowed in foreign currency from a source outside India, by way of issue of any long term bond or rupee denominated bond on or after the 1st day of April,2020 but before the 1st day of July, 2023, which is

listed only on a recognised stock exchange located in any International Financial Services Centre.

These amendments will take effect from the 1st April, 2020.

Extract of Relevant Amendment Proposed by Finance Bill, 2020

82. Amendment of section 194LC.

In section 194LC of the Income-tax Act,–

(i) in sub-section (1), the following proviso shall be inserted, namely:–

“Provided that in case of income by way of interest referred to clause (ib) of sub-section (2), the income-tax shall be deducted at the rate of four per cent.”;

(ii) in sub-section (2),–

(a) in clause (i), in sub-clause (a) and sub-clause (c), for the figures “2020”, the figures “2023” shall be substituted;

(b) in clause (ia), for the figures and word “2020, and”, the figures and word “2023, or” shall be substituted;

(c) after clause (ia), the following clause shall be inserted, namely:––

“(ib) in respect of monies borrowed by it from a source outside India by way of issue of any long-term bond or rupee denominated bond on or after the 1st day of April, 2020 but before the 1st day of July, 2023, which is listed only on a recognised stock exchange located in any International Financial Services Centre, and”;

(iii) in the Explanation, after clause (b), the following clauses shall be inserted, namely:––

‘(c) “International Financial Services Centre” shall have the meaning assigned to it in clause (q) of section 2 of the Special Economic Zones Act, 2005;

(d) “recognised stock exchange” shall have the meaning assigned to it in clause (ii) of Explanation 1 to clause (5) of section 43.’.

Source- Finance Bill 2020 / Union Budget 2020-21

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