21/06/2017

Limit on Interest deduction- Section 94B ( Author - HIMANSHU TIWARI )

As per the newly inserted section 94B through Finance Act 2017, there shall be a limit on the amount of interest deduction in certain specified cases. Provisions have been explained in this tax alert.

In case an Indian company or permanent establishment of a foreign company being a borrower pays interest exceeding rupees 1 crore in respect of any debt issued in either of following manners:

  • Directly from the associated enterprises of such borrower or
  • Indirectly through a lender which is not associated but an associated enterprise either provides an implicit or explicit guaranteeto such lender or deposits a corresponding and matching amount of funds with the lender as security for such loan

In case the above conditions are satisfied then the deduction of excess interest would not be allowed. Excess interest shall be the lower of following:

  • Total interest paid or payable in excess of thirty percent of EBITDA (earnings before interest, taxes, depreciation and amortisation) of the borrower in the previous year or
  • Interest paid or payable to associated enterprises for that previous year.

Excess interest shall be allowed to be carried forward for 8 Assessment Years immediately succeeding the assessment year for which the disallowance was first made.


The tax impact of above amendment is simply explained by way of following example:

Particulars
Reference
 Year 1
 Year 2
 Year 3
 Case 1
 Case 2
 Case 1
 Case 2
 Case 1
 Case 2
EBITDA
100,000
100,000
300,000
300,000
500,000
500,000
30% of EBITDA
A
30,000
30,000
90,000
90,000
150,000
150,000
Interest paid to:
– AE
B
20,000
80,000
20,000
80,000
20,000
80,000
– Non AE
C
80,000
20,000
80,000
20,000
80,000
20,000
 Total interest paid
 D = B + C
 100,000
100,000
 100,000
 100,000
 100,000
 100,000
Add: brought forward interest disallowed of last year
E
–
–
20,000
70,000
30,000
80,000
 Total interest for the purpose of deduction
F = D + E
100,000
100,000
120,000
170,000
130,000
180,000
Interest to be disallowed, lower of:
– Excess of total interest over @ 30% of EBIDTA
EBITDA
G = F – A
70,000
70,000
30,000
80,000
NA*
30,000
– Actual interest paid to AE (including last year’s brought forward)
H = B + E
20,000
80,000
40,000
150,000
50,000
160,000
Disallowance to be carried forward for 8 years
Lower of G or H
G or H
20,000
70,000
30,000
80,000
NIL*
30,000
* In this case, since total interest paid is less than 30% of EBIDTA, hence there will be no disallowance

While these provisions aim to protect the tax base of India, the stringent requirement of 30% of EBIDTA may pose some challenges in the genuine cases, especially for start-up companies which are in the initial years of operations and are incurring losses. Further, capital intensive companies or infrastructure companies with long gestation period may also suffer disallowances, until such disallowances are fully absorbed by the profits in the subsequent years.

Another issue could arise in the situations where interest paid to the AE is considered to be at arm’s length but because of these provisions (and the manner of computation) some portion of arm’s length interest paid to the AE, may need to be disallowed


About the author

HIMANSHU TIWARI

CHARTERED ACCOUNTANT
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