Remove exemption on ECBs

FOREIGN ENTERPRISES

External commercial borrowings (ECB) is fast becoming the major source of financing in India. The low rate of interest is the major attraction for giving preference to ECB compared to other borrowing options.

This provides a level-playing field to the industry located in India compared to industry abroad where financing at low rate is easily available.

The importance of ECBs as a major source of finance has attracted the government's attention. The government has accordingly announced a new ECB policy vide its circular No 60 of January 31 and circular No 75 of February 23.

The new liberalised policy is commensurate with FIIs investment in India, which in the current year has crossed a record of $9 billion (expected to cross $10 billion by March 31).

The salient features of the new policy are ECBs can now be accessed under two routes, automatic route and approval route. The automatic route will be available subject to following limits:-

• $20 million with minimum average maturity of three years.
• Above $20 million and up to $500 million with minimum average maturity of five years.
• ECBs up to $20 million can have call/put option provided the minimum average maturity of three years is complied.

ECBs can be raised only for investment (such as import of capital goods, new projects, modernisation/expansion of existing production units) in the real sector - the industrial sector, including small and medium enterprises and the infrastructure sector.

In India the infrastructure sector is defined as power, telecommunication, railways, roads including bridges, ports, industrial parks and urban infrastructure like water supply, sanitation and sewage projects.

The permitted end-use for ECBs is also to include overseas direct investment in joint ventures/wholly-owned subsidiaries.

This will facilitate corporates to undertake fresh investment or expansion of existing joint ventures/wholly-owned subsidiaries, including mergers and acquisitions abroad, by harnessing resources at globally competitive rates.

Refinancing of the existing ECBs by raising fresh loans at a low cost is also allowed subject to certain norms. The all-in-cost ceilings for ECBs are minimum average maturity period, all-in-cost ceilings over 6 month LIBOR, 3 years and up to 5 years (200 basis points) and over 5 years (350 basis points).

The new policy will certainly boost ECBs. But the provisions of the Income Tax Act, on the other hand, are rather discouraging to foreign lenders.

Under the provisions of Section 10(15)(iv), the income by way of interest payable by specified Indian entities on certain borrowings in foreign currency was exempted from tax. But the situation changed after the Budget for 2001-02.

The finance minister in his Budget speech said "having regard to the fact that interest received by the lender is taxable in the country of his residence and he will get a credit for any tax paid by him in India, any exemption from the tax liability in the host country does not benefit the lender but only resorts in reducing our tax revenues. I , therefore, propose that tax exemption in respect of interest paid on such external commercial borrowings will not be available for such borrowings made on or after June 1, 2001".

The provisions of income-tax will act counter to the encouragement recently announced by the RBI. It will be in the interest of Indian economy to synchronise the policy relating to ECBs by withdrawing the exemption from tax imposed by the Finance Act, 2001.

agar@nda.vsnl.net.in