Limit on Interest deduction (Section 94B)
As per the newly inserted section 94B through Finance Act 2017, there shall be a limit on the amount of interest deduction in certain specified cases. Provisions have been explained in this tax alert.
In case an Indian company or permanent establishment of a foreign company being a borrower pays interest exceeding rupees 1 crore to to its Nonresident AE in respect of any debt issued in either of following manners:
In case the above conditions are satisfied then the deduction of excess interest would not be allowed.
Excess interest shall be the lower of following:
Excess interest shall be allowed to be carried forward for 8 Assessment Years immediately succeeding the assessment year for which the disallowance was first made.
While these provisions aim to protect the tax base of India, the stringent requirement of 30% of EBIDTA may pose some challenges in the genuine cases, especially for start-up companies which are in the initial years of operations and are incurring losses. Further, capital intensive companies or infrastructure companies with long gestation period may also suffer disallowances, until such disallowances are fully absorbed by the profits in the subsequent years.
Another issue could arise in the situations where interest paid to the AE is considered to be at arm’s length but because of these provisions (and the manner of computation) some portion of arm’s length interest paid to the AE, may need to be disallowed.