The Indian government has lowered the taxes charged on money borrowed by Indian companies in foreign currency. The changes are included in Finance Act 2012, which amends section 115A of the Income Tax Act and inserts a new section, 194LC, in the legislation. New rates will apply to the interest paid to a non-resident by an Indian company for money borrowed in foreign currency from a source outside India, either under a loan agreement or by way of long-term infrastructure bonds.
Under the reforms, the interest income of a non-resident investor will be taxed at a reduced rate of 5%. The rate currently sits at 20%. In addition, the liability of the Indian company to withhold tax on such income will be at the reduced 5% rate. The money must be borrowed during a three year period, beginning July 1, 2012 and ending June 30, 2015. The borrowing and the rate of interest must be approved by the Indian government.
The government has also announced that it will now grant approval to all borrowings by way of loan agreement and long-term infrastructure bonds, provided that these transactions satisfy certain conditions. The aim is to lower the compliance burden and reduce the time lag which would arise on account of case-by-case approval, the Finance Ministry says.
