INDIA Law and Practice Contributed by: Anish Mashruwala, Utsav Johri, Megha Upadhyaya and Sahil Unadkat, JSA
8. Tax Issues 8.1 Stamp Taxes
may also be claimed in the country of residence, subject to the applicable laws of such country. 8.3 Thin-Capitalisation Rules Interest paid on debt incurred to acquire equity or preference shares (held as a capital asset and not as stock-in-trade) is generally not consid- ered as a deductible expense for tax purposes. Provisions dealing with thin capitalisation in respect of interest payments are embodied in the Indian Income Tax Act 1961. These impose limi- tations on the deduction of excess interest (ie, any amount that exceeds 30% of the earnings before interest, taxes, depreciation and amorti- sation of the borrower being an Indian company or a PE of a foreign company) incurred by way of interest or payments of a similar nature by an Indian company or a PE to its non-resident asso- ciate enterprise in respect of debt borrowed. The thin-capitalisation rules are also applicable in instances of interest payments to third-party lenders who provide a loan on the basis of an associated enterprise, either providing an explic- it or implicit guarantee to that third-party lender or depositing a corresponding amount with that lender. Thin-capitalisation provisions do not apply to Indian companies and PEs engaged in certain specified businesses such as banking or insur- ance or certain notified NBFCs. The above rules are applicable only where the interest or payments of a similar nature exceed INR10 million. The interest expense that is disal- lowed against income of a particular year shall be allowed to be carried forward and allowed as a deduction against profits and gains of busi- ness or profession for a period of up to eight years, subject to the limits mentioned.
Stamp duty is required to be paid on a facil- ity agreement and security documents at the time of or prior to execution. An insufficiently stamped document is not admissible as evi- dence in a court of law. Stamp duty differs from state to state and is determined based on the nature of the document. 8.2 Withholding Tax/Qualifying Lender Concepts Interest payments by an Indian company on money borrowed or debt incurred in foreign currency on or after 1 July 2023 shall be sub- ject to tax withholding at 20% (plus applicable surcharge and cess), while in other cases, tax withholding at 35% (plus applicable surcharge and cess) would apply. This is subject to the availability of tax treaty benefits and compli- ance with the requisite conditions for availing such benefits. Foreign banks that have a branch in India (ie, a permanent establishment – PE) and which are generally taxed at the rate of 35% (plus applica- ble surcharge and cess) can apply for and obtain a certificate allowing the borrower to deduct tax at a lower appropriate rate, having regard to the overall tax liability of the Indian branch of the for- eign bank. Upon sharing such a certificate with the borrower, the borrower can withhold tax at the rate prescribed therein. The act of withholding tax is an obligation of the borrower, who must deposit the taxes withheld with the authorities, file a quarterly tax withhold- ing return and issue a certificate evidencing the tax withheld and deposited. The lender can claim the credit of the tax withheld on interest to meet its tax liabilities in India. A credit for such taxes
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