Make India Inc's foreign debt cheaper, RBI suggests government

The Reserve Bank of India has asked the government to consider a uniform rate of withholding tax for overseas borrowings, irrespective of type and currency. If this happens, cost of overseas borrowing for Indian companies will lower down.

According to the experts, the move will improve the ability of Indian companies to raise money, given that funds are expected to flow back to the US as interest rates rise there.

Interest paid to a non-resident on foreign currency borrowing or debt is currently subject to 5-20% withholding tax, with the standard rate being 10%. The 5% rate is applied to some priority sectors such as infrastructure.

"It is for the government to decide on a uniform rate, whether it is to be at 5% or 20%. This is still being discussed,” an official aware of the deliberations, told ET.

Currently, the government provides exemptions on money raised through an infrastructure debt fund or loans raised through long-term bonds. In case of loans, a 5% withholding tax is applicable if it has been approved by the central government and the money is borrowed between July 2012 and June 2017. A similar exemption is provided for rupee-denominated bonds for all borrowings till June 2017. The withholding tax rate also depends on bilateral treaties.

"The exemptions were provided keeping in view the requirement of funds in the infrastructure sector. RBI's stance that this will clear ambiguity is well taken,” a finance ministry official, who did not wish to be identified, told ET.

Experts said in the current global scenario, when it is anticipated that funds will flow back to the US due to rising interest rates there, the move to simplify withholding taxes will help Indian companies to raise money.

"The synchronisation will lead to a consistent approach and provide certainty for raising long-term funds, particularly for the infrastructure sector,” Vishal Shah, a partner at PwC, told ET.

"A uniform and concessional withholding tax across any form of foreign debt will cut interest burden for Indian borrowers,” Naresh Makhijani, partner at KPMG India, told ET.