INDIA Law and Practice Contributed by: Divyanshu Pandey, Utsav Johri, Sucheta Bhattacharya and Nishal Makharia, JSA Advocates & Solicitors
and interest 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 corporate guarantee. However, the provi - sions prescribing the above tax position have been challenged and are pending before the High Court(s). Stamp duty is applicable on the financing docu - ments and the issuance of NCDs. 4.3 Tax Concerns for Foreign Lenders Generally, interest paid on debt incurred for the purpose of carrying on business would be deductible for tax purposes. However, interest paid on debt incurred to acquire equity or prefer - ence shares (held as a capital asset and not as stock-in-trade) may not be considered deduct - ible for tax purposes. Provisions dealing with thin capitalisation (ie, limitation on deductibility of interest) in respect of other interest payments are contained in the Income Tax Act of 1961 (IT Act) and impose limi - tations 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 associat - ed 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 pay - ments 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 depositing 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 disal - lowed against income shall be allowed to be car - ried forward and allowed as a deduction against profits and gains of any business or profession carried out for up to eight assessment years, subject to the limits mentioned. In addition, interest payments made to associ - ated enterprises would also be subject to the arm’s length test under the Indian transfer pric - ing provisions. 4.4 Tax Incentives Double Taxation Avoidance Agreements in India prevent taxpayers from being taxed twice on the same income in two countries, including private credit investors. They promote cross-border investment by providing reduced withholding tax rates on interest and other income. Certain tax benefits are prescribed for invest - ments made at the fund level – ie, the taxes are to be paid by an AIF in an International Financial Service Centre (IFSC). FPIs are also subject to tax based on a special tax regime that applies to them where securities held by FPIs are treat - ed as capital assets. AIFs can benefit from an exemption from tax on income in certain cases. 4.5 Non-Bank Status Thin capitalisation provisions do not apply to Indian companies and PEs of non-residents engaged in the business of banking or insurance, nor to specified finance companies located in an IFSC or notified NBFCs.
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