Lower TDS deduction at the rate of 5% under section 194LC extended to any type of long term bonds raised in foreign currency subject to compliance of conditions specified under circular 15/2014.
Section 194LC of the Income-tax Act, 1961, introduced by the Finance Act 2012,provided for lower withholding tax at the rate of 5% on the interest payments by Indian companies on borrowings made in foreign currency by such companies from a source outside India. The benefit was available in respect of borrowings made either under an agreement or by way of issue of long term infrastructure bonds.
Earlier, there was principally two modes of borrowing (referred to as “monies borrowed” in the said section) which are covered, subject to approval of the Central Government:
a. Monies borrowed under a loan agreement
b. Long term Infrastructure Bonds
Now the concessional withholding of tax @ 5% under section 194LC extended to borrowing by way of any long term bonds w.e.f 1st October, 2014
Section 194LC further provided that such borrowing and the rate of interest should be approved by the Central Government. Subsequently with a view to lower the compliance burden and reduce the time lag which would have arisen on account of case-by-case approval, the Central Government had decided to grant approval to all borrowings by way of loan agreement and long term infrastructure bonds provided they satisfy certain conditions . The approval and the conditions were detailed in the CBDT Circular No.7 of 2012 dated 21st September, 2012.
The Finance (No. 2) Act, 2014 has amended section 194LC with effect from the 1st Day of October, 2014. Consequent to the amendment, the concessional rate of withholding tax has been extended to borrowing by way of any long term bonds, not limited to a long term infrastructure bond, if the borrowing is made on or after 1st day of October, 2014.
Further, Earlier circular provided the sunset date for the lower rate of withholding tax is for monies borrowed or bonds issued during the period from 1.7.2012 to 30.6.2015. Now, the concluding date of the period of borrowings eligible for concession under Section 194LC extended to borrowings made before the 1st day of July, 2017.
Now, the approval of the Central Government is further required in respect of long term bond issue and the rate of interest to be paid on such borrowings.
Considering the fact that there would be a large number of bond issues to be undertaken by Indian companies, providing a mechanism involving approval in each and every specific case would entail avoidable compliance burden on the borrower/issuer of bond.
In order to mitigate the compliance burden and hardship, the Central Board of Direct Taxes [with the approval of t h e Central Government] conveys the approval of the Central Government for the purposes of section 194LC in respect of the issue of long term bond including long term infrastructure bond by Indian companies which satisfy the following conditions:-
a. The bond issue is at any time on or after 1st day of October, 2014 but before the 1st day of July, 2017.
b. The bond issue by the Indian company should comply with clause (d) of sub section (3) of section 6 of the Foreign Exchange Management Act, 1999 read with Notification No. FEMA3/2000-RB viz. Foreign Exchange Management (Borrowing or Lending in Foreign exchange) Regulations 2000, dated May 3, 2000, as amended from time to time, (hereafter referred to as “ECB regulations”), either under the automatic route or under the approval route.
c. The bond issue should have a loan Registration Number issued by the Reserve Bank of India (RBI).
d. The term “longterm” means that the bond to be issued should have original maturity term of three years or more.
Further, the Central Government has also approved the interest rate for the purpose of section 194LC in respect of borrowing by way of issue of long term bond including long term infrastructure bond.