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 to to its Nonresident AE 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 guarantee to 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.

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

4 Comments

  1. Urvish Sanghvi says:

    True, I am also of the opinion that the limit of Rs. 1 crore is applicable in case where the interest paid to Non Resident Associated Enterprise Only. This article create doubt in the mind of the readers that this limit is applicable on the total payment of interest.

    The Author of the article must clear the doubts of the readers in this connection.

    I appreciate the efforts of the readers to elaborate the provisions of Section 94B in details.

  2. 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.

  3. 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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