Based on India’s commitment to counter tax avoidance, recently the Finance Bill, 2017 has proposed to introduce new section i.e. section 94B namely Limitation on interest deduction in certain cases. The said section is in line with the recommendations of OECD BEPS Action Plan 4 and provides that interest expenses claimed by an entity to its associated enterprises shall be restricted to 30% of its earnings before interest, taxes, depreciation and amortisation or amount of interest paid or payable to the associated enterprise, whichever is less. Further, any excess interest over and above 30% in any year shall be carried forward for succeeding 8 years for set-off.
This will also be applied in cases where the debt is by way of implicit or explicit guarantee to the lender by the associated enterprise. Banks and Insurance business are proposed to be excluded from the ambit of the said provisions keeping in view of special nature of these businesses.
The introduction of proposed section 94B in Finance Bill, 2017 indicated the intention of Government at Centre and its commitment to implementation BEPS Action plans to counter tax avoidance. Also, various changes made to current direct tax regime including transfer pricing signifies India’s stand to merge its current direct tax laws with internationally adopted best practices converting Indian society to a more efficient, compliant and dynamic from a tax perspective.