Provisions of newly inserted Section 194 LC for Tax Deduction by Indian Specified Company on Interest paid to Non resident / Foreign Company is not applicable to Buyers Credit.
Summary of Provision
- For money borrowed during: July 1, 2012 – June 30, 2015.
- Withholding Tax (WHT) at 5% instead of 20% (plus applicable surcharge and education cess).
- Under Loan Agreement; or By way of Issue of Long term Infrastructure bonds
- Loan should be in Foreign Currency (Definition as per FEMA Act 1999, Sec 2 (m) “foreign currency” means any currency other than Indian currency)
- By Specified Company was defined in original Finance Bill 2012 as infrastructure firm but the same was amended to any Indian Company.
- Interest Rate as per approved rate by Central Government (RBI Master Circular on External Commercial Borrowing and Trade Credit. AAR Ruling which states that RBI approval to be consider as Central Government approval)
- Indian Company is responsible for Tax deduction
Ministry of Finance Notification (Dated: 21-09-2012)
Over and above the above details, Ministry of Finance notification also clarifies below point.
With a view to lower the compliance burden and reduce the time lag which would arise on account of case-by-case approval, the Central Government has decided to grant approval to all borrowings by way of loan agreement and long-term infrastructure bonds that satisfy certain conditions. No specific approval in such cases would be required. Broadly, borrowings under a loan agreement or by way of issue of long-term infrastructure bonds that comply with External Commercial Borrowings (ECB) regulations as administered by the Reserve Bank of India (RBI) would be eligible for availing of the benefit of this concessional tax regime. Further, in case of long-term infrastructure bonds the end use of the proceeds of such bond issue should be for the infrastructure sector as defined by RBI under its ECB regulations. The details of the conditions to be satisfied are elaborated in the circular on approval of loan agreements/ long-term infrastructure bonds under Section 194 LC of Income Tax Act, dated 21/09/12 issued by the Central Board of Direct Taxes (CBDT).
- The borrowing of money should be under a loan agreement.
- The monies borrowed under the loan agreement by the Indian company should comply with clause (d) of sub section (3) of section 6 of the Foreign Exchange Management Act, 1999 read with Notification No. FEMA3/2000-RB viz. Foreign Exchange Management (Borrowing or Lending in Foreign exchange) Regulations 2000, dated May 3, 2000, as amended from time to time, (hereafter referred to as “ECB regulations”), either under the automatic route or under the approval route.
- The borrowing company should have obtained a Loan Registration Number (LRN) issued by the Reserve Bank of India (RBI) in respect of the Agreement.
- No part of the borrowing has taken place under the said agreement before 1st July, 2012.
- The agreement should not be restructuring of an existing agreement for borrowing in foreign currency solely for taking benefit of reduced withholding tax rates.
- The end use of the funds and other conditions as laid out by the RBI under ECB regulations should be followed during the entire term of the loan agreement under which the borrowing has been made.
Reasons why non applicability to Buyers Credit:
To avail benefit under above section, either there has to be loan agreement and neither satisfy conditions layed down in CBDT Circular. Thus, in case of buyers credit Sec 194LC is not applicable.
- Finance Bill 2012-12
- Amendment to Finance Bill 2012-13
- RBI Master Circular on External Commercial Borrowing (ECB) and Trade Credit: Dated: 01-07-2012
- Ministry of Finance Notification: Dated: 21-09-2012
- CBDT Circular: Dated: 21-09-2012