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I-T exemption on ECB interest -- Panel for status quo on withholding tax

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NEW DELHI, Jan. 30

FINANCIAL institutions and key infrastructure Ministries which are pressing for the re-introduction of the exemption on withholding tax on external commercial borrowings (ECBs) in the 2002-03 Budget may be in for some disappointment if the Finance Ministry accepts the recommendation of the N.K. Singh panel.

According to Government officials, the Singh panel has made a clear-cut suggestion to maintain the status quo on the decision to withdraw the income-tax exemption on the interest payable on ECBs.

This is notwithstanding the argument put forth by FIs and a couple of infrastructure Ministries in the run-up to the Budget that the withholding tax of 20 per cent on the interest paid to the lenders of the ECBs has been a deterrent, impacting overseas borrowings.

The Singh panel has endorsed the view taken by the Shome Committee that the exemption may have been justified when tax rates in India were relatively higher than those in the lender's country of residence since the lender could not have availed of credit for the full amount of taxes paid in India.

However, with a reduction in tax rates, there is really no justification in continuing with the exemption, reckons the panel whose members include the Revenue Secretary, Dr S. Narayan, and senior officials of the Finance Ministry.

The panel has also contended that any re-introduction of the withholding tax exemption on the interest on ECBs would be counterproductive, given that the thrust of the ensuing Budget is on weeding out tax exemptions. This is also consistent with the stand taken by the Revenue Department that any exemption from tax liability in India does not really benefit the lender, but only reduces tax revenues mobilised here.

Following the decision taken by the Finance Ministry in the Budget, 2001-02 interest received by foreign entities on ECBs (which are payable by Indian entities) has now become taxable if such interest relates to monies borrowed on or after June 1, 2001 or if the agreements for the loan have been entered into or approved on or after June 1, 2001.

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