Tax incentive for funding of certain Infrastructure Sectors

Section 115A of the Income Tax Act provides that any interest income received by any non-resident from the Government or an Indian concern shall be taxable at the rate of 20% on the gross amount of such interest income. The interest income received by a non-resident from a notified Infrastructure Debt Fund (IDF) is taxable at a reduced rate of 5% on gross amount of such interest income.

Section 195 of the Act provides that in case of any interest payment made to a non-resident tax shall be deducted (withholding tax) at the rate in force. Currently, the rate of 20% withholding tax is prescribed, in case of any interest paid by the Government or Indian concern to a non-resident.

In order to augment long-term low cost funds from abroad for the infrastructure sector, it is proposed to provide tax incentives for funding certain infrastructure sectors from borrowings made abroad subject to certain conditions.

It is proposed to amend Section 115A of the Income Tax Act to provide that any interest paid by a specified company to a non-resident  in respect of borrowing made in foreign currency from sources outside India between 1st  July, 2012 and 1st  July, 2015, under an agreement, including rate of the interest payable, approved by the Central Government, shall be taxable at the rate of  5% (plus applicable surcharge and cess).

The specified company shall be an Indian company engaged in the business of –

(i)   construction of dam,

(ii)  operation of Aircraft,

(iii)  manufacture or production of fertilizers, (iv)  construction of port including inland port, (v)   construction of road, toll road or bridge;

(vi)  generation, distribution of transmission of power

(vii) construction of ships in a shipyard; or

(viii) developing and building an affordable housing project as is presently referred to in section 35AD(8)(c)(vii).

This amendment will take effect from 1st   April, 2013 and will, accordingly, apply in relation to the  Assessment Year 2013-14  and subsequent assessment years.

It is further proposed to insert a new section 194LC to provide that interest income paid by such specified company to a non- resident shall be subjected to tax deduction at source at the rate of  5% (plus applicable surcharge and cess).

This amendment will take effect from 1st  July, 2012.

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