Section 194LC- Income by way of interest from Indian Company
Issue/Justification
a) Income by way of interest from Indian Company
The Finance Act, 2012 inserted section 194LC to provide that the interest income paid by specified company or business trust to a non- resident shall be subjected to tax deduction at source at the rate of 5%. Section 115A was also amended to provide that such income will be taxed at the rate of 5%
Section 194LC(2)(ii) provides that for the purpose of deduction of tax at source at the rate of 5%, the interest payable by the specified company or business trust to a non- resident, not being a company or a foreign company, shall be the income payable by the specified company TO THE EXTENT TO WHICH SUCH INTEREST DOES NOT EXCEED the amount of interest calculated at the rate approved by the Central Government in this regard, having regard to the terms of the loan or the bond and its repayment.
It is imperative to note that usage of the term “To the extent to which such interest does not exceed” may be interpreted to mean that in case the borrowings are made at a rate higher than the rate approved by the Central Government, the interest income on the difference will be chargeable to tax at the rate of 20%. As per the explanatory memorandum, this amendment was made in order to augment long-term low cost funds from abroad. It is felt that this is an inadvertent mistake and thus needs to be reworded.
b) Expansion of scope and extension of time limit
The Finance Act, 2012 had introduced Section 194LC in the Act to provide for lower deduction of tax @ 5 per cent on interest payments by Indian companies on borrowings made in foreign currency (under a loan agreement or by way of issue of long term infrastructure bonds) before 31 July 2017.
The Finance (No 2) Act, 2014, amended Section 194LC of the Act to include all long term bonds (including infrastructure bonds).
Apart from loans and bonds, debentures are also widely used for raising funds by the Indian companies. Currently, there is no clarity whether interest payment on such debentures would be eligible for reduced tax deduction rate under Section 194LC of the Act.
Also, the cut-off date as provided in the section (31st July 2017) is impendent. In line with the objective of the government to attract foreign investments and a higher growth rate, the current time lines may be extended.
Suggestion
a) In order to bring out the real intent of the law, it is suggested that the section 194LC(2)(ii) may be reworded to provide that the interest referred to in sub-section (1) shall be the income by way of interest payable by the specified company or business trust “IF such interest does not exceed the amount of interest calculated at the rate approved by the Central Government in this regard, having regard to the terms of the loan or the bond and its repayment”
b) The concessional tax rate of 5 per cent on interest should be made applicable on other debt securities including debentures, trade credit issued/ availed by any Indian company.
(SUGGESTIONS TO REDUCE / MINIMIZE LITIGATIONS)
Is 194LC applicable to all Foreign ECB Loans including from Foreign Banking Co’s
What is the rate approved by central government for this purpose.