Issues relating to Tax Deducted at Source on ECB interest Payments

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 .

 

Now , Bangladesh Nationals can open an NRO Bank Account in India under Automatic Route

Opening of NRO accounts by individuals of Bangladesh Nationality

Attention of all the Authorised Dealer banks and Authorised banks (Authorised banks) is invited to Paragraph 1 of Schedule-3 of Foreign Exchange Management (Deposit) Regulations, 2000 contained in Notification No. FEMA.5/2000-RB dated May 3, 2000, as amended from time to time, in terms of which opening of Non-Resident Ordinary Rupee (NRO) accounts by individuals/ entities of Bangladesh/ Pakistan nationality/ ownership requires approval of Reserve Bank.

2. The extant instructions have been reviewed and it has been decided that henceforth, Authorised banks would be permitted to open NRO account of individual/s of Bangladesh nationality without the approval of the Reserve Bank subject to the following conditions:

1. The bank concerned should satisfy itself that the individual is holding valid visa and valid residential permit issued by Foreigner Registration Office (FRO)/Foreigner Regional Registration Office (FRRO) concerned;
   
2. The Authorised bank should put in place a system of quarterly reporting whereby each branch of the Authorised bank shall maintain a record of the bank accounts opened by individual/s of Bangladesh nationality and details of such account shall be forwarded to their Head Office. The Head Office of the bank shall furnish details of such accounts on quarterly basis to the Under Secretary (Foreigners), Ministry of Home Affairs, NDCC-II Building, Jai Singh Road, New Delhi - 110 001. E Mail.
   
3. The report shall contain details of Name/s of the Individual/s, Date of arrival in India, Passport No. and Place/Country of issue, Residential permit reference and date and place of issue, Name of the FRO/ FRRO concerned and the Complete address and contact number of the branch where the bank account is being maintained.

3. Opening of accounts by entities of Bangladesh ownership shall continue to require approval of Reserve Bank, as hitherto.
4. Necessary amendments to the Notification No. FEMA.5/2000-RB dated May 3, 2000 have been issued vide Notification No.FEMA.253/2013-RB dated January 02, 2013

Ref:A.P.(DIR Series) Circular No. 82 dated 11 February 2013