Budget extends period of lower withholding tax on ECB

Indian companies seeking foreign debt may continue to see their cost of capital fall amidst a rise in overseas investor interest with government extending a concessional 5 per cent withholding tax on these overseas papers.

Presenting the Budget proposals in Parliament, Finance Minister Nirmala Sitharaman extended the period of lower tax on external commercial borrowings (ECB) made by the corporate sector by another three years till June 30, 2023.

She also extended the period of lower rate of withholding of 5 per cent for interest payment to Foreign Portfolio Investors (FPIs) and Qualified Foreign Investors (QFIs) in respect of bonds issued by Indian companies and government securities.

"In order to make available foreign funds at a lower cost, I propose to extend the period of concessional withholding rate of 5 per cent under section 194LC for interest payment to non-residents in respect of moneys borrowed and bonds issued up to 30th June, 2023," Sithraman said presenting the Budget proposals for FY21.

The budget has also extend the concessional tax rate of withholding under section 194LD to the interest payment made on the Municipal Bonds. This is expected to make these instruments attractive and allow agencies to raise funding at cheaper rates.

Sithraman said that the concessional rate structure would also be provided for instruments listed on international exchanges. "In order to incentivise listing of bonds at IFSC exchange, I propose to further reduce the withholding rate from 5 per cent to 4 per cent on interest payment on the bonds listed on its exchange," she said.

The extension of the concessional withholding tax rate including on rupee denominated bonds may act in favour of borrowers, leading to a likely reduction in borrowing costs. This could prompt more such issues. Low cost borrowing is important for fund mobilisation and investment by the corporate sector. This has also a bearing on country's growth prospects that has slowed to six year low level of 4.5 per cent of GDP in the July-September quarter.

Interest paid to a non-resident on foreign currency borrowing is subject to withholding tax. A concessional withholding rate of 5 per cent is being charged on interest earned by foreign entities in ECB or in bonds and Government securities.

The government first announced extension on concessional tax on ECB in the budget for FY18 for a period of three years till June end 2020. It also liberalised end use of ECB by including a host of activities while allowing a larger segment of entities eligible to tap ECBs of varying maturities. Withholding tax on ECB otherwise would work out to 20 per cent.

At a time when domestic interest rates remain relatively higher, ECB provides a window to mobilise cheaper debt and reduce their overall cost of borrowing.

( With inputs from IANS )