Section 194LC and Section 206AA- Scope of concessional rate of tax on overseas borrowings

Issue/Justification

Currently as per the provisions of section 194LC of the Act, interest paid by an Indian company to a nonresident, in respect of approved borrowings made (during the period 1 July 2012 to 30 June 2015) in foreign currency from sources outside India (under a loan agreement or on issue of long-term infrastructure bonds) is taxable at a concessional rate of 5% (plus applicable surcharge and education cess).

Further, as per section 206AA(7) of the Act, interest paid on the long term infrastructure bonds would be subject to a concessional rate of tax irrespective of whether the lender has a Permanent Account Number (PAN) in India or not.

In order to further augment low cost long-term overseas borrowings, the amendments to section 194LC and section 206AA of the Act respectively are made effective from 1 October 2014. Under the aforesaid proposed amendment, the benefit of lower withholding tax @5% for overseas borrowing is extended up to 1 July 2017 and it shall apply to all long term bonds and not merely restricted to infrastructure bonds as is the case under the relevant provisions of the existing Income tax Act.

Further, the benefit of section 206AA(7) of the Act, shall be extended to all types of long term bonds including infrastructure bonds, which means PAN of beneficial holders of bonds shall not be mandatory for all types of long term bond issues in the international market.

Hardships

While the fiscal measure taken by the Government to encourage the corporates to raise long term capital at competitive price for their capital expenditure are appreciated, there is an urgent need for making the proposed amendments effective from 1 April 2014 so that companies can take advantage of the prevailing opportune market conditions.

In this connection, the global market conditions have been summarized below:

> The international debt markets are very strong and buoyant, with the Asia ex Japan G3 market seeing over US$116bn in 2014 till date in issuance volumes, nearly 83% of total issuance in 2013.

> Investor liquidity remains very strong, and there are consistent fund flows back into emerging market and Asian bonds for the past 14 consecutive weeks.

> US treasury yields remain significantly lower than at the start of the year, as the markets gauge the outlook for the global economy, geopolitical risks and the expected actions of the Central Banks. 2.55% / 3.37%.

> US rates at 2.55% for 10 years and 3.37% for 30 years remain conducive for issuers looking to extend duration, with the 30- year US Treasury currently close to a 9 month low.

> Global credit market conditions remain very strong with credit spreads having tightened sharply over the past year.

> The demand for Indian credits has been extremely strong, with Indian credit spreads having tightened by 30-40 bps since 1 April and 80-100 bps since 1 February 2014. This has been driven by supportive technicals, relative lack of supply and improved macro indicators.

These favorable financial market conditions could get impacted in the short term by changes in the economic data emanating from the major economies as well as due to geopolitical factors such as the continued unrest in the Middle East.

Suggestion

It is, therefore, suggested to make the aforesaid amendments to the Act effective from 1 April 2014 to enable corporates to use this rare window of opportunity to raise long term capital at competitive price, for their capital expenditure. There are quite a few proposals in the pipeline for raising long term capital from the international debt markets which could get adversely impacted if this amendment is implemented as per the currently enacted timeline of 1st October 2014. Therefore, there is an urgent need to make the amendment effective as suggested.

Source-  ICAI Pre- Budget Memorandum–2018 (Direct Taxes and International Tax)

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