RBI seeks to make India Inc's foreign debt cheaper

NEW DELHI | MUMBAI: The Reserve Bank of India has suggested a uniform rate of withholding tax for overseas borrowings, irrespective of type and currency. If the government agrees, this could lower the cost of overseas borrowing for Indian companies.

Simplifying the levy 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, experts said.

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,” said an official aware of the deliberations.


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,” said a finance ministry official, who did not wish to be identified.

Banks have been lobbying with the government and RBI to exempt rupee-denominated offshore bonds, popularly known as masala bonds, from withholding tax, currently pegged at 5%.

“Withholding tax adds to the cost of the bond, which deters some investors,” said a senior banker, requesting anonymity. So far, HDFC is the only company to have issued masala bonds, raising Rs 5,000 crore in four tranches in 2016 at an interest rate of 8.3% for the first three and 7.25% for the last. It has got RBI approval to raise another Rs 3,000 crore through this route.

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,” said Vishal Shah, a partner at PwC. “A uniform and concessional withholding tax across any form of foreign debt will cut interest burden for Indian borrowers,” said Naresh Makhijani, partner at KPMG India.

An email sent to RBI did not elicit any response. Withholding tax is deducted at source usually on the interest paid to an investor outside the country.

“Uniformity in the withholding tax levy will help both investors and issuers as both bear the burden, depending on the deal structure,” said Kalpesh Mehta, a partner at Deloitte.