Wednesday, February 13, 2013
Issues relating to Tax Deducted at Source on ECB interest Payments
From April 1, 2010, under Section 206A of the I- T Act, any person entitled to receive a sum or income or amount on which tax is deductible in these cases is required to furnish his PAN to the person responsible for deducting such tax. If the PAN isn’t there, tax has to be deducted at 20 per cent.
The Finance Act, 2012, introduced Section 194LC in the I- T Act, providing for a lower withholding tax at five per cent on interest payments by Indian companies on borrowings made in foreign currency by such companies from a source outside India.
If an ECB lender obtains a PAN number in India , then the Indian borrower company has to deduct only 5% of Income Tax by way of Tax Deductible at source in India.
Thus, the income-tax paid in India on behalf foreign company for ECB interest payments can be offset by the foreign company in their jurisdiction if there is relevant provision under Double Taxation Avoidance Agreement .(DTAA) .
But it is observed that if a foreign lending company do not want to get a PAN number in India , then , it has to pay a 20% tax in India as TDS.
In practice , most of the foreign ECB lenders to Indian companies do not prefer to get a PAN number in India for the best reasons known to them. As such , they have to pay higher TDS as per the extant provisions.
Industry has approached to find suitable alternative for PAN registration by foreign lenders who advances ECB to Indian companies so that they can pay just 5% TDS on interest payments instead of TDS of 20% without PAN number in India.
Indian Government is actively considering the same .