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Monday, Jan 28, 2002

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$1.3-b overseas borrowings -- Reliance set to pay hefty withholding tax

Shaji Vikraman

NEW DELHI, Jan. 27

THE Government has taken a final view to deny tax benefits to Reliance Industries Ltd (RIL) in the form of an exemption on withholding tax on external commercial borrowings (ECBs) aggregating $1.3 billion raised by the company prior to 2000.

The decision to deny the benefit of an exemption from withholding tax on these borrowings was taken last week at a meeting of the high-level committee comprising senior officials from the Finance Ministry and the Reserve Bank of India, according to Government officials.

The denial of the exemption on withholding tax on overseas commercial borrowings for RIL was on account of violations of the ECB norms laid down by the Government, they said. The primary charge against the company was that it had allegedly violated the end-use norms stipulated in the ECB guidelines by parking abroad the proceeds of the ECBs raised prior to 1999 and aggregating $1.3 billion well beyond the stipulated period of one year.

However, it was forced by the Government and the RBI to repatriate the entire proceeds in 1999-2000. Ever since this case came to light, the company has been unable to secure any approvals from the Government for overseas borrowings. This included a proposal submitted by the company in 2001 to raise $500 million.

RIL was earlier the largest Indian corporate borrower in the international loan and bond markets.

The decision of the high-level committee to reject the appeal of RIL against the decision of the Government will impact the company severely as the burden of the withholding tax on the interest income will have to be borne by the company's lenders, especially foreign banks.

The withholding tax works out to 20 per cent on an average depending on the double taxation avoidance agreement with various countries. Prior to June 1, 2001, all companies used to enjoy the benefit of an exemption from withholding tax on ECBs. However, the Government knocked this off in last year's Budget.

The decision taken last week will imply that any interest payments coming up for the company's ECBs will have to factor in the withholding tax. Generally, interest payments on borrowings are made on a semi-annual basis. RIL has borrowings of various maturities including one bond offering in the US with a maturity of 100 years.

The verdict caps a soap opera-like sequence of the last two years, when the company was first served with a notice by the Government for not adhering to the end-use norms stipulated in the ECB guidelines. Since then, the company had appealed to the RBI and the Finance Ministry against the decision.

Subsequently, the issue was referred to a high-level committee headed by the RBI Governor. The committee also recommended that the company should not be given an exemption on withholding tax.

After RIL presented its case again through some high-profile lawyers, the issue was again referred to the Attorney-General. In his comments, the AG mentioned that the cancellation of the tax benefits should have been done after giving a notice to the company.

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