0.1452
900 319 0030
x

Budget 2017 - Curbing Thin Capitalisation

iasparliament Logo
February 03, 2017

Why in news?

The steps were taken in Union Budget 2017 to address the issue of thin capitalisation.

What is Thin Capitalisation?

When a local company has more debt than equity, then the arrangement is called thin capitalisation.

Why is thin capitalisation bad?

  • Generally interest paid for a debt is not taxed.
  • Therefore an Indian unit would pay high interest to the foreign associated firm to avoid tax.
  • Also the interest paid by the local company to the foreign associate was taxable at a lower rate when the foreign company was registered in a tax treaty country.

What is EBITDA?

  • Earnings before interest, tax, depreciation and amortization (EBITDA) is a measure of a company's operating performance.
  • It is a way to evaluate a company's performance without having to include financing decisions, accounting decisions or tax environments.

What are the measures taken?

  • Section 94 B of the Finance Bill, 2017 increased the tax burden on local company with thin capitalisation.
  • If the interest paid by a local company is more than 30% of Ebitda, it will not  beallowed any tax exemption.
  • Section 94 B is applicable to an Indian firm or MNC operating via permanent establishment in India, which has debt from a non-resident associated enterprise and pays interest or similar consideration of over Rs 1 crore to the associated enterprise.

What are the consequences?

  • Introduction of thin capitalisation rules is in line with international practice.
  • But it also has some negative effects.
  • Tax payment of several companies with high debt and low Ebitda could increase, reducing their profitability.
  • This provision could have an adverse impact on capital intensive and highly leveraged companies.
  • This will affect the capacity of a borrower to repay the interest on borrowings and therefore it is a negative for banks too.
  • New companies setting up branches or subsidiaries will also need to factor in the thin capitalisation limitations while determining their funding structure i.e might deter new investments.

 

Source: Business Standard

Login or Register to Post Comments
There are no reviews yet. Be the first one to review.

ARCHIVES

MONTH/YEARWISE ARCHIVES

Free UPSC Interview Guidance Programme