INDIA Law and Practice Contributed by: Utsav Johri, Sucheta Bhattacharya and Nishal Makharia, JSA Advocates & Solicitors
3.8 Payment in Kind/Amortisation Payment in kind (PIK) structures as a mode of repay - ment are not uncommon in India. Some of the largest private credit deals have featured full PIK structures. However, lenders prefer an amortised structure or a part PIK/part payments structure where a portion of the return on investment is paid on an amortised basis. 3.9 Call Protection The following call protection measures are typically seen in private credit transactions. • Lock-in periods: no prepayment of the loan/NCDs is permitted during the lock-in period. Any payment during the lock-in period may require the borrower to pay certain make-whole amounts. • Make-whole provisions: if there is any repay - ment of the loan/NCDs by the borrower prior to a specified period, the borrower is required to pay an amount equal to the interest the lender would have received had the NCDs/loans been repaid after the specified period. • Prepayment premiums: imposing a percentage- based fee on the principal amount for prepayments within a specified period. Interest payments to foreign private credit lenders are subject to withholding tax. Such lenders can claim the credit of the tax withheld on interest to meet their tax liabilities in India and in the country of residence. Such withholding tax is mitigated by the addition of relevant tax gross-up provisions in the relevant documents. Where a foreign credit player has invested in an AIF in India and the AIF has in turn made the credit available to the borrower, then the income is not taxed in the hands of the AIF (if incorporated as a Category II AIF). A Category II AIF that is incorporated as a trust will enjoy pass-through status, but the unit holders may be taxed depending on their jurisdiction of incorpora - tion and any double taxation treaty available with the country of incorporation of the creditor. 4. Tax Considerations 4.1 Withholding Tax
4.2 Other Taxes, Duties, Charges or Tax Considerations Apart from direct tax, there are implications from an indirect tax perspective. While the principal and inter - est payable against a loan are exempt from the levy of goods and services tax (GST), any other consideration such as processing fees/charges will be subject to GST at the rate of 18%. Furthermore, GST is payable on the issuance of a cor - porate guarantee. However, the provisions prescribing the above tax position have been challenged and are pending before the Indian courts. Stamp duty is applicable on the financing documents and the issuance of NCDs. 4.3 Tax Concerns for Foreign Lenders Generally, interest paid on debt incurred for the pur - pose of carrying on business would be deductible for tax purposes. However, interest paid on debt incurred to acquire equity or preference shares (held as a capi - tal asset and not as stock-in-trade) may not be con - sidered deductible for tax purposes. Provisions dealing with thin capitalisation (ie, limitation on deductibility of interest) in respect of other inter - est payments are contained in the Income Tax Act of 1961 (IT Act) and impose limitations on the deduction of excess interest – ie, any amount that exceeds 30% of the EBITDA of the Indian company or permanent establishment (PE) – incurred by way of interest or payments of a similar nature by an Indian company or a PE of a foreign company to its non-resident associ - ated enterprise in respect of debt borrowed. These are not applicable to AIFs set up as a trust. Furthermore, the thin capitalisation rules may also be applicable in instances of interest payments to third- party lenders who provide a loan on the basis of an associated enterprise, either providing an explicit or implicit guarantee to that third-party lender or deposit - ing a corresponding amount with that lender. The above rules are applicable only where the interest or payments of a similar nature exceed INR1 Crore. The interest expense that is disallowed against income can be carried forward and allowed as a deduction
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