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Remove Withholding Tax For Private Banks In Foreign Currency Loan: Assocham

The Associated Chambers of Commerce and Industry of India (Assocham) has urged the Finance Ministry to allow all private banks to raise foreign currency borrowings to finance infrastructure projects, exempting these from paying a withholding tax on interest charged on such borrowings.

The Chamber thus, sought removal of this anomaly by urging the Finance Ministry to review this maltreatment against private banks in its forthcoming budget proposals for 2007-08 which Dr. Patil committee has already recommended for.

The Chamber note has argued saying, “”It is well recognized that foreign currency borrowings are a cost effective source of funds for corporates and infrastructure financing. Banks also raise such funds to meet their commitments in infrastructure / priority sector lending. However the withholding tax on the interest paid on such borrowings has in a way affected the cost structure of borrowings and given rise to increase in rates for lending by banks. While the public sector banks are exempted (in case of borrowings from their own overseas branches) from the levy, all others are subjected to it. The corporates sourcing directly the foreign currency markets are also subjected to such a levy.

In addition, the chamber has also emphasized a case for reviewing & removal of such a withholding tax arguing that it will ensure a level playing field to all institutions, and provide cost effectiveness through foreign currency borrowings.

It will also attract inflow of funds into India and develop forex based treasury management services, besides promoting the concept of equity.

The ASSOCHAM has also pointed out that section 80LA (1) deals in deduction with respect to certain incomes from Offshore Banking Units (OBU), saying that this section limits the benefits and offers only to Scheduled Banks of Indian origin in extending tax treatment. This also needs to be review to ensure sufficient level playing fields.

The chamber also sought new instruments to finance infrastructure, stressing that banks are constants due to asset liability mismatch in financing long-term infrastructure projects. ”Recognizing such a difficulty there is a case for developing the long term debt capital issues through innovative instruments. One such instrument could be an issue of Long Term, say 15 years and over-secured/ unsecured debentures with full/partial/optionally convertible terms any time during the tenure depending on market conditions with full disclosures by all infrastructure companies in Telecom, Power, Road/Construction, etc. and also by Banks”.

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