CA Dinesh Singhal
CA Dinesh Singhal

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 in respect of any debt issued in either of following manners:

  • Directly from the associated enterprises of such borrower or
  • Indirectly through a lender which is not associated but an associated enterprise either provides an implicit or explicit guaranteeto such lender or deposits a corresponding and matching amount of funds with the lender as security for such loan

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:

  • Total interest paid or payable in excess of thirty percent of EBITDA (earnings before interest, taxes, depreciation and amortisation) of the borrower in the previous year or
  • Interest paid or payable to associated enterprises for that previous year.

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.

The tax impact of above amendment is simply explained by way of following example:

(Amount in Lacs)

 

 

Particulars

 

 

Reference

 Year 1  Year 2  Year 3
 Case 1  Case 2  Case 1  Case 2  Case 1  Case 2
EBITDA 100000 100000 300000 300000 500000 500000
30% of EBITDA A 30000 30000 90000 90000 150000 150000
Interest paid to:
– AE B 20000 80000 20000 80000 20000 80000
– Non AE C 80000 20000 80000 20000 80000 20000
 Total interest paid  D = B + C

 

 100000

 

100000  100000  100000  100000

 

 100000

 

Add: brought forward interest disallowed of last year  

E

 

 

 

20000

 

70000

 

30000

 

80000

 Total interest for the purpose of deduction  

F = D + E

 

100000

 

100000

 

120000

 

170000

 

130000

 

180000

Interest to be disallowed, lower of:
– Excess of total interest over @ 30% of EBIDTA

EBITDA

 

G = F – A

 

70000

 

70000

 

30000

 

80000

 

NA*

 

30000

 

– Actual interest paid to AE (including last year’s brought forward)

 

H = B + E

 

20000

 

80000

 

40000

 

150000

 

50000

 

160000

Disallowance to be carried forward for 8 years  

Lower of G or H

 

20000

 

70000

 

30000

 

80000

 

NIL*

 

30000

* In this case, since total interest paid is less than 30% of EBIDTA, hence there will be no disallowance

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.

More Under Service Tax

Posted Under

Category : Service Tax (3411)
Type : Articles (18224)
Tags : Budget (1957) Budget 2017 (356)

2 responses to “Limit on Interest deduction- Section 94B wef 01.04.2017”

  1. VISHAL D MEHTA says:

    THE ABOVE EXAMPLE IS NOT IN TACT WITH THE PROVISIONS OF SECTION 94B .THIS IS BECAUSE THE ABOVE SECTION IS APPLICABLE ONLY WHEN THE INTEREST EXCEEDS RS 1 CRORE , WHICH IS NOT SO IN THE EXAMPLE.

  2. Yogesh says:

    In my view, this article is wrong as the above sec is only for Interest paid to Non-Residents but in this article, it is shown as applicable to all

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