Budget 2017: Thinly capitalised, overseas promoted companies to pay more tax

MUMBAI: India took a leaf out of the tax law prevalent in Europe to bind profitable, but thinly capitalised companies floated by non-resident Indian and foreign entities to the tax net.

Such companies whose interest outgo was over 30% of operating profit or EBITDA could claim the same as expense and set it off against tax liability. Budget FY18 bars such set off. This will hit companies as they would have to pay heavier tax.

Budget FY18 has proposed that interest paid by permanent establishment of a foreign company or non-resident Indian, “in excess of thirty percent of earnings before interest, taxes, depreciation and amortisation (EBITDA), or interest paid to its associated enterprise, whichever is less, shall not be allowed as deduction in computing its taxable profit.”

This will impact companies with high debt-equity ratios operating in capital intensive infrastructure projects like roads, ports, telecom, power, etc.

“Foreign or NRI promoters will now have to get in more capital while setting up ventures in India,” said Seshagiri Rao MVS, joint MD, JSW Steel. “Apart from increased inbound investment (FDI), the move will discourage overleveraging.”

The proposal will ensure foreign entities to contribute significant equity to capital intensive projects.

It is also proposed to allow carry forward and set off of the interest so disallowed for eight assessment years. The effect of this will be since the loan is serviced the outgo as a proportion of EBITDA would decline below 30% in successive years.