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    Companies may find it costlier to raise funds overseas

    Synopsis

    Overseas lenders will have to pay as much as 20% tax on interest earned on loans made to Indian companies starting July 1 and are likely to pass on the costs to borrowers, according to more than a dozen executives. The increased withholding tax rate would impact several big-ticket foreign funds, said market experts.

    fund.Agencies
    While those are the ground rules, they don't usually work that way, said people with knowledge of the matter. The foreign lender typically passes on the cost of the tax paid in India to the Indian borrower by making it part of the commercial agreement.
    New Delhi: India Inc's foreign borrowing costs could rise with the possible end of a decade of tax breaks that kept the external commercial borrowing (ECB) issuances market buoyant. The government is not inclined to extend the tenure of concessional withholding tax rate for foreign portfolio investors (FPIs) participating in debt markets, which ends on June 30, said a senior government official.

    Overseas lenders will have to pay as much as 20% tax on interest earned on loans made to Indian companies starting July 1 and are likely to pass on the costs to borrowers, according to more than a dozen executives. The increased withholding tax rate would impact several big-ticket foreign funds, said market experts.

    However, the government official told ET that concession doesn't benefit Indian companies in any big way and even if the withholding tax rate goes higher, the effective tax paid by FPIs will remain unchanged.
    bonds

    Two Routes
    Indian companies can raise debt from non-residents through two routes. The ECB mechanism is for borrowings in foreign currency. The FPI route is for foreign investment in rupee-denominated debt.

    Foreign lenders pay a withholding tax of 5% on interest earned from loans to Indian companies, as do FPIs for investments in government securities and corporate bonds. The increased rates will likely be passed on to borrowers, making it expensive for them to raise funds overseas.

    "I think the impact on foreign borrowing is clear - at higher tax rates, no further issuances would be feasible," said Parag Sharma, chief financial officer, Shriram Finance, a non-bank finance company (NBFC) with ₹1.8 lakh crore in assets.

    The concessional withholding tax rate was introduced by the government in 2013 - in the wake of the surge in US treasury yields following investor reaction to the US Federal Reserve's announcement that it would be tapering bond purchases - to attract more foreign flows into Indian debt markets. Since then, the government has been extending the benefit every three years. However, the budget did not announce an extension.

    "(While introducing the concessional rate) the tax department had given up its right to charge higher withholding tax in general as per DTAAs (double taxation avoidance agreements) and this rate is not benefitting our companies," said the official cited above. "It is also not helping the foreign funds either since they can claim tax credits (in their home jurisdictions) for whatever tax they pay in India."

    Ajay Goel, chief financial officer of Vedanta Ltd, concurred that costs will climb after July 1 but said the metals and mining group will be insulated from the rate increase. "Vedanta Ltd has insignificant forex borrowings. So, there is almost nil impact on us," he said. "Vedanta Resources' borrowings are in London or overseas," Goel said. Indian tax laws do not apply to UK-registered Vedanta Resources.

    Reliance Industries, the Aditya Birla Group, Bharti Airtel, Tata Motors and JSW Steel, major borrowers in the foreign currency market, did not provide any official comment on the new tax regime. "This move will increase the cost of foreign currency borrowings and for some instruments such as foreign currency bonds it could potentially make it so prohibitive that issuers dramatically reduce access to this mode," said Chetan Joshi, HSBC's managing director and head of debt financing.

    The withholding tax or tax deducted at source is levied on the foreign lender or debt investor as the government of India considers the interest income earned by them as taxable in India. The foreign lender or debt investor can claim the tax credit for the tax paid in India when filing income statements with tax authorities in their respective country of domicile.

    While those are the ground rules, they don't usually work that way, said people with knowledge of the matter. The foreign lender typically passes on the cost of the tax paid in India to the Indian borrower by making it part of the commercial agreement.

    India companies raised about $30 billion overseas through the ECB route in calendar year 2022 as per Reserve Bank of India (RBI) data. This included funds raised through foreign currency loans and bond issuances. Reliance Industries and Reliance Jio Infocomm alone raised $5 billion, the data showed.

    The executives who spoke to ET were unable to quantify the impact of the new rates on borrowing costs because various companies borrow at different rates based on their credit profile.

    Tax experts noted that there are certain relaxations in the new regime. Under the new rules, if a company raises money from a lender domiciled in a country with which India has a tax treaty, then the treaty rates would be applied for calculating withholding tax on the interest earned.

    “Not everybody gets charged the 20% rate. For example, for the US, the treaty rate is 10%. So for a loan given by a bank from that country, they would pay withholding tax on interest at that rate,” said Neeru Ahuja, partner, Deloitte.

    Still, most stakeholders were disappointed by the changes with some even suggesting that the higher rates will ensure borrowers rush to local banks and the local debt market, creating demand pressure.

    “The idea of bringing in the concessional tax rate in 2012 was to spur the market for foreign currency borrowings and enable a more vibrant fundraising environment,” said a top finance executive at an Indian conglomerate who did not wish himself or his company to be identified. “The concession was even extended a few times and we were expecting that the same would be done this time as well.”

    FPI debt investment contracts are tax bearing, according to tax experts, implying that foreign funds quote how much interest they will receive in hand irrespective of the tax rate.

    “The applicability of 5% concessional tax rate should have been extended by the government to encourage foreign investments in India debt,” said Siddhartha Shah, senior partner, Khaitan & Co. “In recent times, with increasing cost of Indian debt, the concessional withholding rate for FPIs participation in the Indian debt market would have encouraged more foreign capital flows.”

    Shah said the lower withholding tax rate could have also provided access to cheaper debt for Indian businesses. FPIs are a major participant in Indian debt markets, owning assets of Rs 2.4 lakh crore as on December 2022, depository data showed. Additionally, they have invested Rs 1.4 lakh crore in the special debt scheme Voluntary Retention Route.






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    (What's moving Sensex and Nifty Track latest market news, stock tips and expert advice, on ETMarkets. Also, ETMarkets.com is now on Telegram. For fastest news alerts on financial markets, investment strategies and stocks alerts, subscribe to our Telegram feeds .)

    Download The Economic Times News App to get Daily Market Updates & Live Business News.

    Subscribe to The Economic Times Prime and read the Economic Times ePaper Online.and Sensex Today.

    Top Trending Stocks: SBI Share Price, Axis Bank Share Price, HDFC Bank Share Price, Infosys Share Price, Wipro Share Price, NTPC Share Price

    ...more
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