NO TAX ON LOAN INTEREST FOR FOREIGN ENTITIES' INDIA OPS [3 December 2010]

If a foreign company pays interest on loan for carrying out operations in India it will be allowed taxexemption under the Income Tax Act, 1961, a tax tribunal has ruled. This has put to rest uncertaintieson application of Thin Capitalisation rules that allow tax authorities to reclassify excessive debt as equity and tax it. The Mumbai Bench of the Income Tax Appellate Tribunal has ruled that interest paymentsby Belgium-based Besix Kier Dabhol's project office for debt taken to carry out operations in India, is an allowable expense under the Income Tax Act. The revenue department had argued that the debt of the assesseeshould be re-characterised as equity, but the tribunal said it was not sustainable as thin capitalisation rules do not exist in India. It said thin capitalisation rules or general anti-avoidance measures, proposedby the Direct Taxes Code cannot be applied to transactions which take advantage of treaty provisions, on the ground that some anti-abuse provisions will be introduced in the law in the future that may render such transactions illegal. Thin capitalisation is a situation where a higher proportion of funds are infused into a company in the form of debt rather than equity because interest paid on loans is normally deductible for calculating taxable profits, whereas dividends are paid post tax. "By holding that thin capitalisation rules and other anti-avoidance measures cannot be applied in India unless DTC is enforced, the Tribunal has put torest the uncertainty around the application of the provisions of the proposed DTC on matters pending before various courts/tribunals. This should provide some guidance to taxpayers in India," said Pranay Bhatia, The tribunal held that the assessee in this case earns income only from its operations in India, and thus, the income earned by the project office n India will be computed as per the provisions of the Double Taxation Avoidance Agreement (DTAA). There was no specific provision under the I-T Act which provides for computation of profits attributable to the Indian arm of a foreign enterprise. So the income is computed under normal accounting principles and in terms of general provisions of the Act. Thin capitalisation rules exist in the US, Poland, Hungry, Germany, the Netherlands, Russia and China. Most countries define a maximum debt to equityratio beyond which excess interest paid is disallowed, or penalty is imposed, or interest is reclassified as debt. While some countries limit the amount a company can claim as tax deduction on interest paid to a cross-borderor related company, some disallow interest deductions above a certain level from all sources. 

DISCLOSE ALL FEES IN APPLICATION FORM, SAYS RBI [2 December 2010]

The Reserve Bank of India (RBI) has once again advised banks and financial institutions to ensure that all information relating to charges or fees for processing of loans should be disclosed in the loan application forms. This is applicable to all loan application forms across all categories of loans, irrespective of the loan amount. This will facilitate comparison of charges across lenders. The circular posted on the RBI website says, "With a view to bringing in fairness and transparency, banks are advisedthat they must transparently disclose to the borrower all information about fees/charges payable for processing the loan application…" Lenders have been asked to disclose on their forms, any fees or charges payable to process the loan application. If the loan amount is not sanctioned or disbursed for some reason, the amount of fees that is refundable to you is to be mentioned on the application form. The form should carryinformation on prepayment options along with the charges, if any, states the circular. Details about the amount of late payment fee in case of delay in repayments and charges on switching loans from a fixed to a floating interest rate or vice versa are also to be mentioned. The lender would also have to mention interest reset clause,if any. RBI has also advised lenders to make this information available for the public on their websites. Some lenders still don't have information on fees and charges, especially interest rates, on their websites. Says K.V.S.Manian, group head (consumer banking), Kotak Mahindra Bank Ltd, "With us, the application form for home loan itselfis an agreement form, so all the details on fees and charges is normally there. In case of personal loan and creditcards, too, the details are on the form itself." But just because such details are mentioned on the application formdoes not mean you can't go ahead and negotiate. Manian says, "There is always room for negotiations. It depends onthe customer's relationship with the bank." As per an older circular, few banks charged a fee, apart from the processing fee. This charge was not disclosed to customers initially. The current circular, addressed to scheduledbanks and all India financial institutions, however, does not give any such details. Another RBI circular on the same issue, addressed to state and central cooperative banks, mentions that few banks are still continuing these unfair practices.