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K.R. Srivats

New Delhi , May 28

THE Finance Ministry has sought opinion from the Reserve Bank of India on whether the interest paid on usance period under foreign bills of exchange should be treated as part of the purchase price or be characterised as interest payments.

Usance is the period of time permitted by commercial usage for the payment of a bill of exchange (especially a foreign bill of exchange).

The central bank's opinion would have a bearing on taxation (tax deduction at source issues) of such payments.

"We are looking into the issue of usance interest. The opinion of the RBI has been sought. The issue is if usance interest is payable for delay in payment of purchase price, why should it not be treated as interest?" a senior Finance Ministry official told Business Line here.

A tax expert said that at least two high courts of the country have come up with different viewpoints (although in different time period) on how usance interest should be treated or characterised.

Sources highlighted that the Gujarat High Court had recently held that usance interest are only in the nature of interest payments and cannot be treated as part of purchase price.

On the other hand, there is already a high court judgment that has treated such usance interest as part of purchase price, the tax expert said.

The expert pointed out that the characterisation (in this case whether interest or purchase price) would determine the nature of income at the hands of the recipient.

More Stories on : RBI & Other Central Banks | Forex | Interest Rates

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