India 2017 Budget Introduces Thin Capitalization Rules | KPMG | CA

India's 2017 Budget Introduces Thin Capitalization Rules

India 2017 Budget Introduces Thin Capitalization Rules

India presented its Union Budget 2017-18 before Parliament on February 1, 2017.

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The budget introduces new restrictions on interest deductibility (thin capitalization rules) in line with the OECD base erosion and profit shifting (BEPS) project, among other tax measures.

The budget also re-affirms the government's commitment to implement the GST and highlights recent progress related to rate structure, draft law, and administrative mechanisms.

New thin capitalization rules

This budget introduces a cap on the total interest deduction to 30% of a company's earnings before interest, taxes, depreciation and amortization. The cap applies to interest paid or payable to non-resident associated enterprises by an Indian company or a permanent establishment of a foreign company in India. Any interest that exceeds the cap is disallowed under the new rules, but may be carried forward up to eight years and qualify for a future deduction. Taxpayers engaged in banking or insurance businesses will not be affected by the new rules, which will be applicable beginning in financial year 2017-18.

Other provisions

Some of the other key tax provisions in India's 2017-18 budget include:

  • A reduction in the corporate tax rate to 25% for domestic companies with gross revenue of INR500 million or less in financial year 2015-16 
  • A 100% tax holiday for eligible start-up companies, applicable to any three out of seven years from its incorporation 
  • An extension of the eligible period for concessional lower withholding tax rate of 5% to June 30, 2020 (from June 30, 2017), applicable for interest paid to non-resident lenders on certain foreign currency commercial borrowings and certain rupee denominated bonds issued overseas 
  • A commitment to implement the goods and services tax (GST)

The capital gains tax regime remains unchanged.

For more information, contact your KPMG adviser.

Information is current to February 28, 2017. The information contained in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's National Tax Centre at 416.777.8500

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