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

EEFC ACCOUNT HOLDERS ARE NOW PERMITTED TO ACCESS THE FOREX MARKET FOR PURCHASING THE FOREX EVEN IF THEY HAVE BALANCE IN EEFC ACCOUNTS

EEFC ACCOUNT HOLDERS ARE NOW PERMITTED TO ACCESS THE FOREX MARKET FOR PURCHASING THE FOREX EVEN IF THEY HAVE BALANCE IN EEFC ACCOUNTS

 

 

Attention of Authorised Dealer (AD) Category - I banks is invited to A.P. (DIR Series) Circulars Nos. 15, 124, 128, 8 and 12 dated November 30, 2006, May 10, 2012, May 16, 2012, July 18, 2012 and July 31, 2012 respectively, in terms of which all the foreign exchange earners were permitted to retain their foreign exchange earnings in EEFC account subject to certain conditions with an Authorized Dealer (AD) Category - I bank in India.

2. Keeping in view the operational difficulties faced by the account holders and the Authorized Dealer banks, as a measure of rationalization, it has been decided to dispense with the stipulation made in A.P. (DIR Series) Circular No. 124 dated May 10, 2012, that EEFC account holders henceforth will be permitted to access the forex market for purchasing foreign exchange only after utilizing fully the available balances in the EEFC accounts.

 

Ref _ A.P.(DIR Series) Circular No. 79  dated January 22, 2013

Now , Hotel project total project cost of INR 250 crore or more avail ECB to repay their high Cost Rupee Loan or to incur fresh Rupee capital expenditure

Now , Hotel project total project cost of INR 250 crore or more avail ECB to repay their high Cost Rupee Loan or to incur fresh Rupee capital expenditure

As per the extant guidelines, Indian companies in the manufacturing and infrastructure sector (as defined under the extant ECB policy), which are consistent foreign exchange earners, are allowed to avail of ECBs for repayment of outstanding Rupee loan(s) availed of from the domestic banking system and / or for fresh Rupee capital expenditure.

On a review, it has been decided to include Indian companies in the hotel sector (with a total project cost of INR 250 crore or more), irrespective of geographical location as eligible borrowers under this scheme.

 

AD may certify the project cost at the time of forwarding the ECB application to the Reserve Bank.

 

REF:A.P. (DIR Series) Circular No.78 dated January 21, 2013

Common Types of Reporting Failures by Indian Companies and their Authorised Dealers to RBI under FEMA

Common Types of Reporting Failures by Indian Companies and their Authorised Dealers to RBI under FEMA .

In terms of Section 11 (2) of FEMA, 1999, the Reserve Bank may, for the purpose of ensuring the compliance with the provisions of the Act or of any rule, regulation, notification, direction or order made thereunder, direct any authorized person to furnish such information, in such manner, as it deems fit. Accordingly, RBI has entrusted to the Authorised Dealers (ADs) the responsibility of complying with the prescribed rules/ regulations for the foreign exchange transactions and reporting the same as per the directions issued from time to time.

During the compounding process, on a number of occasions, it has been brought to our notice by the applicants that the contraventions of the provisions of FEMA by corporates and individuals are due to the acts of omission and commission of the Authorised Dealers and some of the applicants have also produced documentary evidence in support of their claim. Such contraventions being dealt with by the Reserve Bank mainly relate to:

• Draw down of External Commercial Borrowing (ECB) without obtaining Loan Registration Number (LRN) [Regulations 3 and 6 of FEMA 3/2000];
• Allowing draw down of ECB under the automatic route from unrecognised lender, to ineligible borrower, for non-permitted end uses, etc. [Regulations 3 and 6 of FEMA 3/2000];
• Non-filing of form ODI for obtaining UIN before making the second remittance to overseas WOS/JV for Overseas Direct Investment (ODI) [Regulation 6(2)(vi) of FEMA 120/2004];
• Non-submission of Annual Performance Reports (APRs) / copies of Share Certificates to the AD (and non-reporting thereof by the AD to Reserve Bank) in respect of overseas investments [Regulation 15 of FEMA 120/2004];
• Delay in submission of the Advance Reporting Format in respect of Foreign Direct Investment (FDI) to the concerned Regional Office of the Reserve Bank [paragraph 9 (1) (A) of Schedule I to FEMA 20/2000];
• Delay in filing of details after issue of eligible instruments under FDI within 30 days in form FC-GPR to the concerned Regional Office of the Reserve Bank [paragraph 9 (1) (B) of Schedule I to FEMA 20/2000];
• Delay in filing of details pertaining to transfer of shares for FDI transactions in form FC-TRS by resident individual/companies [Regulation 10 (A) (b) of FEMA 20/2000]; etc.

From the data on compounding cases received by Reserve Bank, it is observed that more than 70% of the total cases pertain to FDI within which about 72% relate to delay in advance reporting/ submission of FCGPR. In the case of ECB, 24% of the cases received relate to drawdown without obtaining LRN. Similarly, 66% of the ODI cases relate to non-reporting of overseas investments online. Authorised Dealers have an important role to play in avoidance of such contraventions and accordingly, the dealing officials in the banks need to be sensitised and trained to discharge this function efficiently.

All the transactions involving Foreign Direct Investment (FDI), External Commercial Borrowing (ECB) and Outward Foreign Direct Investment (ODI) are important components of our Balance of Payments statistics which are being compiled and published on a quarterly basis. Any delay in reporting affects the integrity of data and consequently the quality of policy decisions relating to
capital flows into and out of the country. Authorised Dealers are, therefore, advised to take necessary steps to ensure that checks and balances are incorporated in systems relating to dealing with and reporting of foreign exchange transactions so that contraventions of provisions of FEMA, 1999 attributable to the Authorised Dealers do not occur.

In this connection, it is reiterated that in terms of Section 11(3) of FEMA, 1999, the Reserve Bank may impose on the authorized person a penalty for contravening any direction given by the Reserve Bank under this Act or failing to file any return as directed by the Reserve Bank.

Ref-A.P. (DIR Series) Circular No. 76 January 17, 2013

issue of equity shares/ preference shares under the Government route by conversion of import of capital goods - Amendments

Issue of equity shares/ preference shares under the Government route by conversion of import of capital goods - Amendments

Now, no Shares in the Indian company can be allotted for the seller ofthe second hand imported machinaries . Only foreign suppliers of new machinaries are eligible for issue of Equity shares with the Repatriation benefits under government approval route .

The following is the changes made in the circular  A.P. (DIR Series) Circular No. 74 dated June 30, 2011 read with A.P. (DIR Series) Circular No. 55 dated December 9, 2011.

.(DIR Series) Circular No. 74 dated June 30, 2011	Earlier Condition	Revised condition
Para 3(I)	Import of capital goods/ machineries/equipments (including second-hand machineries),	Import of capital goods/ machineries/equipments (excluding second-hand machineries),
Para 3(I)(b)	There is an independent valuation of the capital goods / machineries / equipments (including second-hand machineries) by a third party entity, preferably by an independent valuer from the country of import along with production of copies of documents /certificates issued by the customs authorities towards assessment of the fair-value of such imports; Ref: A. P. (DIR Series) Circular No.74 dated 10th January 2013	There is an independent valuation of the capital goods / machineries / equipments (excluding second-hand machineries) by a third party entity, preferably by an independent valuer from the country of import along with production of copies of documents /certificates issued by the customs authorities towards assessment of the fair-value of such imports; 

External Commercial Borrowings (ECB) Policy – Non-Banking Financial Company – Infrastructure Finance Companies (NBFC-IFCs)- Further Relaxation

External Commercial Borrowings (ECB) Policy – Non-Banking Financial Company – Infrastructure Finance Companies (NBFC-IFCs)- Further Relaxation

 

 

As per the extant guidelines, Non-Banking Finance Companies (NBFCs) categorized as Infrastructure Finance Companies (IFCs) by the Reserve Bank and complying with the norms prescribed in the DNBS Circular DNBS.PD.CC.No.168/ 03.02.089/2009-10 dated February 12, 2010 are permitted to avail of ECBs, including the outstanding ECBs, up to 50 per cent of their owned funds under the automatic route. ECBs by IFCs above 50 per cent of their owned funds are being considered under the approval route. The permitted end-use should be for on-lending to the infrastructure sector, as defined under the extant ECB policy. IFCs should also hedge their currency risk in full.

 

On a review, it has been decided to enhance the ECB limit for NBFC-IFCs under the automatic route from 50 % of their owned funds to 75 % of their owned funds, including the outstanding ECBs. NBFC-IFCs desirous of availing ECBs beyond 75 % of their owned funds would require the approval of the Reserve Bank and will, therefore, be considered under the approval route.

4. It has also been decided to reduce the hedging requirement for currency risk from 100 per cent of their exposure to 75 per cent of their exposure.

5. Designated Authorized Dealer banks should ensure compliance with the extant norms while certifying the ECB application both under the automatic and approval routes. Designated AD Category – I banks shall continue to certify the leverage ratio (i.e. outside liabilities/owned funds) of NBFC-IFCs desirous of availing ECBs under the approval routewhile forwarding such proposals to the Reserve Bank of India as per A.P. (DIR Series) Circular No.70 dated January 25, 2012.

Simplification and Revision of Softex Procedure at SEZs for all Designated Centers of STPIs ,SEZs, EPZs , EOU and DTA

Attention of the Authorised Dealer Banks is invited to Regulation 6 of the Notification No. FEMA 23/2000-RB dated May 3, 2000 viz. Foreign Exchange Management (Export of Goods and Services) Regulations, 2000, as amended by the Notification No.FEMA.36/2001-RB dated February 27, 2001, in terms of which designated officials of the Ministry of Information Technology/ Ministry of Commerce and Industry(as the case may be), Government of India at the Software Technology Parks of India (STPIs) or at Free Trade Zones (FTZs) or Export Processing Zones (EPZs) or Special Economic Zones (SEZs), had been authorized to certify exports declared through SOFTEX Forms.

2. A revised Softex procedure was first introduced at the 5 designated centres of STPIs from April 1, 2012 vide A.P. (DIR Series) Circular No.80 dated February 15, 2012 and subsequently extended to all STPIs in India vide A.P. (DIR Series) Circular No.47 dated October 23, 2012.

3. It has now been decided to implement the revised Softex procedure at all SEZs/EPZs/100%EOU/DTA also with immediate effect.



4. As per the revised procedure, a software exporter either under STPIs or SEZs/EPZs/100%EOU/DTA, whose annual turnover is at least Rs.1000 crore or who files at least 600 SOFTEX forms annually on all India basis, will be eligible to submit statements in revised excel format sheets as per enclosed Annexures A & B. All other terms and conditions mentioned in the A.P. (DIR Series) Circular No.80 dated February 15, 2012 applicable to exporters of software situated in STPIs would remain unchanged.

Ref- A.P. (DIR Series) Circular No. 66 dated 1st January 2013

External Commercial Borrowings (ECB) for the low cost affordable housing projects is now under permissible end-use under Approval Route

External Commercial Borrowings (ECB) for the low cost affordable housing projects is now under permissible end-use under Approval Route

On a review of the policy related to ECB and keeping in view the announcement made in the Union Budget for the Year 2012-13, it has been decided to allow ECB for low cost affordable housing projects as a permissible end-use,under the approval route. ECB can be availed of by developers/builders for low cost affordable housing projects. Housing Finance Companies (HFCs)/National Housing Bank (NHB) can also avail of ECB for financing prospective owners of low cost affordable housing units.

3. Detailed guidelines on ECB for low cost affordable housing scheme are set out below:-

(I) Definition of eligible project

A low cost affordable housing project for the purpose of ECB would be a project in which at least 60 per cent of the permissible FSI would be for units having maximum carpet area up to 60 square meters.

Slum rehabilitation projects will also be eligible under the low cost affordable housing scheme. The eligibility of slum rehabilitation project for ECB will be based on the parameters to be set by the Central Sanctioning and Monitoring Committee of the Affordable Housing in Partnership Scheme (AHP) constituted under the Chairmanship of Secretary, Housing & Urban Poverty Alleviation (HUPA) which administers the slum rehabilitation projects.

(II) Eligible Borrowers :-

(a) Developers/builders:-

Developers/builders with proven financial track record based on the following criteria shall qualify for availing ECB for low cost affordable housing projects:

i) Developers/builders undertaking low cost affordable housing projects should be a company registered under the Companies Act, 1956;

ii) Such developers/builders should have minimum 5 years’ experience in undertaking residential projects, and should have good track record in terms of quality and delivery;

iii) The developers/builders should not have defaulted in any of their financial commitments to banks/ financial institutions or any other agencies;

iv) The project should not be a matter of litigation;

v) The project should be in conformity with the provisions of master plan/ development plan of the area. The layout should conform to the land use stipulated by the town and country planning department for housing projects; and

vi) All necessary clearances from various bodies including Revenue Department with respect to land usage/environment clearance, etc., are available on record.

(b) Housing Finance Companies (HFCs):-

HFCs, satisfying the following conditions, can avail of ECB for financing prospective owners of low cost affordable housing units: -

i) The HFC should be registered with the National Housing Bank (NHB) and operating in accordance with the regulatory directions and guidelines issued by NHB;

ii) The minimum paid-up capital, as per the latest audited balance sheet, shall not be less than INR 50 crore;

iii) The minimum Net Owned Funds (NOF) for the past three financial years shall not be less than INR 300 crore;

iv) Borrowing through the ECB should be within the HFC's overall borrowing limit of 16 times their Net Owned Funds (NOF);

v) The net non-performing assets (NNPA) shall not exceed 2.5 % of the net advances;

vi) The maximum loan amount sanctioned to the individual buyer will be capped at INR 25 lakh subject to the condition that the cost of the individual housing unit shall not exceed INR 30 lakh; and

vii) The ECB shall be swapped into Rupees for the entire maturity on fully hedged basis.

Besides HFCs meeting norms set at para above, NHB shall be eligible for raising of ECB for financing low cost affordable housing units of individual borrowers. Further, in the event a developer of low cost affordable housing project not being able to raise ECB directly as envisaged above, National Housing Bank shall be permitted to avail of ECB for on-lending to such developers who satisfy the conditions stated in para3 (II) (a) above subject to the interest rate spread set by RBI.

(III) End –use:

ECB proceeds shall be utilized only for low cost affordable housing projects and shall not be utilized for acquisition of land.

(IV) Nodal agency for deciding project’s eligibility for low cost affordable housing

Builders/developers meeting the eligibility criteria shall have to apply to the National Housing Bank (NHB) in the prescribed format. NHB shall act as the nodal agency for deciding a project’s eligibility as a low cost affordable housing project, and on being satisfied, forward the application to the Reserve Bank for consideration under the approval route. Once NHB decides to forward an application for consideration of RBI, the prospective borrower (builder/developer) will be advised by the NHB to approach RBI for availing ECB through his Authorised Dealer in the prescribed format. Guidelines with respect to the format of application, project monitoring, etc. are being separately issued by NHB.

4. Developers/builders/HFCs/ NHB will not be permitted to raise Foreign Currency Convertible Bonds (FCCBs) under this scheme.

5. For the financial year 2012-13, an aggregate limit of USD 1(one) billion is fixed for ECB under the low cost affordable housing scheme which includes ECBs to be raised by developers/builders and NHB/specified HFCs. This limit shall be subject to annual review.

6. All other ECB parameters, such as, recognized lender, minimum average maturity period, all-in-cost ceilings, restrictions on issuance of guarantee, choice of security, parking of ECB proceeds, prepayment, refinancing of ECB, reporting requirements remain unchanged and shall be complied with.

7. The amended policy will come into force with immediate effect and the scheme will be reviewed after a period of one year based on the experience gained in the implementation of the scheme.

8. Reserve Bank of India has since amended the Regulations and notified vide Notification No.FEMA.246/2012 dated November 27, 2012.

Ref- A.P. (DIR Series) Circular No. 61 dated 17 December 2012

Governmnet Announces Additonal Benefits to Exporters

The two-per cent interest subsidy on loans to exporters, which was to end on March 2013, has been extended for another year.

 More export goods have also been brought under the ambit of the scheme with engineering exports being the major beneficiary.

"Since 2008, the commerce ministry has given Rs 3,600 crore to RBI (Reserve Bank of India) to distribute among banks for carrying out the interest subvention scheme,"

 Merchandise shipments to the US, the European Union and the Asian markets will now qualify for additional concessions as exporters are facing a demand slump in these markets due to the economic slowdown.

Several countries, including New Zealand, Bulgaria, Taiwan and Thailand, were added under different export promotion schemes like Focus Market Scheme and Special Focus Market Scheme.

Courtesy - Business Today