New Liberalised External Commercial Borrowings

The Reserve Bank of India (RBI) has recently issued series of Circulars amending and liberalising current External Commercial Borrowings (ECB) Guidelines. The key changes introduced by these Circulars are:

For the Infrastructure Sector


(i)  As per the current Guidelines, repayment of existing Rupee loans is not a permissible end-use for ECB. Considering the specific need of the Infrastructure Sector, Indian Companies in the Infrastructure Sector, have now been permitted to utilise 25 percent of their fresh ECB raised towards refinancing of the Rupee loan/s availed by them from the domestic banking system under the Approval Route (i.e. with Prior RBI’s approval vide an application filed through the Authorised Dealer / Banker) subject to:

        (a) At least 75 percent of the fresh ECB proposed to be raised should be utilised for capital  expenditure towards a 'new infrastructure' project(s) as defined in the ECB Guidelines

        (b) The remaining 25 percent can be utilised for refinance / repayment of the Rupee loan availed for 'capital expenditure' of earlier completed infrastructure project(s) and

        (c) The above refinance to be utilised only for the Rupee loans which are outstanding in the books of the financing bank concerned.

(ii) Towards the above, an application needs to be filed by the eligible Applicant to the RBI through the Authorised Dealer (AD) / Bank along with prescribed details and documents. The AD is obliged to monitor the end-use of funds. Further, Banks in India have been prohibited to provide any form of guarantee(s) for such arrangement. Bridge Finance for Infrastructure Sector

(i) The Indian Companies in the Infrastructure Sector (as defined in ECB Guidelines) have now been permitted to import capital goods by availing short term credit (including buyers’ / suppliers’ credit) in the nature of ‘bridge finance’ with prior RBI’s approval (i.e. under the Approval Route) subject to the following terms and conditions:

(a) The bridge finance to be replaced with a long term ECB;
(b) The long term ECB to comply with all the extant ECB norms; and
(c) Prior RBI approval to be sought for (a) above.

(ii) The AD / Bank needs to monitor the end-use of the funds and is also obliged to verify the evidences for import of capital goods (i.e. Bill of Entry, etc). Further, Banks in India have been prohibited to provide any form of guarantee(s) for such arrangement.

ECB - Rationalisation and Liberalisation (i) The enhanced limits for ECB under the Automatic Route are as under:

Eligible Borrowers	Current Limit	Enhanced Limit
Real Sector- Industrial Sector-Infrastructure Sector	USD 500 million or equivalent per financial year	USD 750 million or equivalent per financial year
Corporate(s) in specified Service Sectors viz. Hotel, Hospital and Software	USD 100 million or equivalent per financial year (as stipulated)	USD 200 million or equivalent per financial year (as stipulated)

(ii) The ECBs can now be designated in INR as under:

(a) All Eligible Borrowers can now avail ECBs in INR from Foreign Equity Holders under the Automatic or the Approval Route as per the extant ECB Guidelines.
(b) NGOs engaged in micro finance activities can avail ECBs designated in INR as hitherto under the Automatic Route from Overseas Organisations and Individuals as per extant ECB Guidelines.

(iii)The Interest during Construction (IDC) is now considered as a permissible end-use for Indian Companies in the Infrastructure Sector (as defined in ECB Guidelines) under the Automatic/Approval Route, as the case may be, subject to the conditions that (a) the IDC is capitalised; and (b) is part of the project cost.

Infrastructure Sector

(i) The Policy relating to Structured Obligations has been liberalised to permit direct foreign equity holder(s) as per extant ECB guidelines (i.e. minimum holding of 25 percent of the paid up capital) and indirect foreign equity holder (atleast 51 percent of the paid-up capital) to provide credit enhancement to Indian companies engaged exclusively in the development of Infrastructure Sector (as defined in the RBI’s ECB Guidelines and Guidelines for the Infrastructure Finance Companies, which have been classified as such by the RBI).

(ii) The credit enhancement by all eligible non-resident entities is now permitted under the Automatic Route (without any prior RBI approval) subject to applicable guidelines and conditions.

Foreign equity holders

(i) Currently, for availing ECBs under the Automatic Route, a ‘foreign equity holder’ is considered as ‘recognised lender’ subject to the following:

(a) For ECB up to USD 5 million: minimum paid-up equity of 25 percent held directly by the lender; and
(b) For ECB more than USD 5 million: minimum paid-up equity of 25 percent held directly by the lender and debt-equity ratio not exceeding 4:1 (i.e. the proposed ECB does not exceeds four times the direct foreign equity holding).

(ii) The above norms have been liberalised as under:
(a) The term 'debt' in the debt-equity ratio has been replaced with 'ECB liability' and the ratio will be known as 'ECB liability'-equity ratio to make the term signify the true position as other borrowings/debt are not to be considered in working out this ratio.
(b) Further, besides the paid-up capital, free reserves (including the share premium received in foreign currency from the lender(s) concerned) as per the latest audited balance sheet will be reckoned for the purpose of calculating the equity of the foreign equity holder. If there are more than one foreign equity holders in the borrowing company, the portion of the share premium in foreign currency brought in by the lender(s) concerned will be considered for calculating the ECB liability-equity ratio for reckoning quantum of permissible ECB.
(c) For calculating the ECB liability, besides the proposed ECB, any outstanding ECB from the same foreign equity holder lender should also be reckoned

(iii)The ECB proposals by Eligible Borrowers from their Foreign Equity Holders (both Direct and Indirect) and Group Companies will now be considered by RBI under the Approval Route as under:-

(a) Service sector units, in addition to those in Hotels, Hospitals and Software, would also be considered as Eligible Borrowers if the ECB is obtained from Foreign Equity Holders. This amendment is intended to facilitate overseas borrowings by Training Institutions, R &D, Miscellaneous Service Companies, etc;
(b) The ECB from Indirect Equity Holders to be considered provided the Indirect Equity Holding by the lender in the Indian company is at least 51 percent; and
(c) The ECB from a group company to also be permitted provided both the Borrower and the Foreign Lender are subsidiaries of the same parent.
(d) The total outstanding ECB, including the proposed ECB from a foreign equity lender, cannot exceed 7 times the equity holding, either directly or indirectly of the Lender (in case of lending by a Group Company, equity holdings by the common parent would be reckoned).
 

Foreign Direct Investment (FDI) policy for the Real Estate sector

CA Maneet Pal
09810774806
http://www.capasricha.com/

The term real estate means a piece of land, including the air above it and the ground below it and any buildings and structures on it. Real estate can include business and/or residential properties and are generally sold either by realtor or directly by the individual who owns the property.

In law the word “real” means relating to a thing as distinguished from a person. Thus the law broadly distinguishes from “real” property and “personal” property (like furniture, clothes etc). IMMOVABLE property was the distinguished feature here, the transfer of title along with the land and, movable property which a person would retain to.

The Boom

India’s Real Estate sector can be recognized as the fastest growing industry. India’s emergence as a leader in global economy over the couple of years has encouraged foreign direct investment. This development has led to more companies from other parts of the world to work with India. The strengthening of the economic relationship of India and other countries has increased the number of joint ventures between the two.

According to an estimate in the eleventh five year plan that is 2007 to 2012 there would be an unsatisfied demand of over 20million houses which are of course a brilliant opportunity to invest in real estate. Since 2005 when government permitted FDI in various sectors of the Indian economy there has been rapid growth in the economy. Back in 2005 when the government broadened the view of FDI and changed the norms back then to 100% involvement in the construction industry, a step had been taken to meet the demands of residential and commercial real estate sectors.

Developments in the Foreign Direct Investment

Due to the amendments made by the government it has persuaded financial firms as well as private equity funds to launch exclusive funds in this particular sector resulting growth in the Private Equity segment (PE). Some of the sectors with 100% Foreign Direct Investment are Mass rapid transport system, Roads and Highways, Toll roads, Ports and Harbors, Hotel and Tourism etc.

Advantages of Foreign Direct Investment

• Affordable housing sector will play a vital role in this rapidly growing and expanding area of business operation.
• Development of SEZ that is the Special Economic Zones as government introduced 100% FDI.
• Housing loans eligible for 1 per cent subsidy.
• The real estate sector of India will become more organized.
• CREDAI chairman said “affordable housing will be a key factor in driving the sector and we have already started working on progressive solutions in this area for effective and customized implementation of such projects.
• US$ 20.3million allocated towards Urban Infrastructure Development.
• It will enable a strong and spirited competition among domestic as well as alien investors.

Permissible areas of FDI in Real Estate

·  townships

·  housing

·  commercial premises

·  hotels

·  resorts

• hospitals
• industrial parks
• resorts
• hospitals
• educational institutions
• recreational facilities
• SEZ’s, etc

Finance available for Real Estate Projects

1. External Commercial Borrowings

External commercial borrowings also known as ECB are nothing but commercial loans raised by financial organizations in India from lenders which are Non Resident Indians that is NRIs to facilitate finance in different projects. These borrowing may be in the form of bank loans, credit from either suppliers or buyers, from instruments like fixed rate bonds, and floating rate notes and investments from Foreign Institutional Investors or FIIs. The Government of India permits these loans as an additional funding to the corporate of India.  The Ministry of Finance regulates the funding in accordance with the guidelines from the Reserve Bank of India (RBI) under the Foreign Exchange Management Act, 1999. The sole purpose of these ECBs is to provide additional funding to the corporate that the usual domestic sector is not able to provide for. The average maturity of external commercial borrowings is pegged at three years at the very minimum. The SEZs or Special Economic Zones can also raise ECBs but their requirement will altogether be different. Even though ECBs are allowed by the government as an additional source of funding but there are also restrictions to the use of such funds. 

a.       All corporate borrowers are eligible to raise ECBs up to a maximum of US$ 500 million under automatic route

b.      ECB can be raised only for investment in real sector - industrial sector including small and medium enterprises and infrastructure sector in India, including industrial/ technology parks and for working capital requirement

c.       ECB not permitted for real estate activities other than development of integrated townships as defined by Press Note 3 (2002 series) (ie the 100 area criteria)

2. Foreign Collaboration models

a.       PRIVATE EQUITY CAPITAL –

As we have discussed above there has been a massive inflow of FDIs in growing India in the past decade or so. And different financial funding have crop up thanks to the encouraging Government policies, among the very widely used financing techniques one is something called as Private Equity. Private Equity consists of institutional investors and funds that make investments directly into private companies or conduct buyouts of public companies that result in a delisting of public equity. Private Equity largely consist of sums lend by investors for long time periods. PE consists of equity securities in operating companies that are NOT publicly traded on a stock exchange. Private Equity investments in India are on a positive approach, more deals are coming up as Indian Entrepreneurs are relaxing and submitting to this type of financial assistance.

b.      Joint Equity

Joint venture companies are the most favored for of business entities in India today. Even companies incorporated in India with 100% foreign equity are treated as Joint Venture.

A Joint Venture is when:

(a)          Two individuals or two companies incorporate a company in India. Business of one party is transferred to the company and as consideration for such transfer; shares are issued by the company and subscribed by that party. The other party subscribes for the shares in cash.

(b)          Above parties subscribe to shares of the joint venture company in agreed proportion, in cash and start a business.

(c)           Promoter shareholder of an existing Indian company and a third party, who/which may be individual/company, one of them non-resident or both residents, collaborate to jointly carry on the business of that company and its shares are taken by the said third party through payment in cash.

International Joint Ventures are becoming more and more popular as they aid companies to form a strategic alliance that is form a relationship between companies to undertake a set of goals while remaining separate business entities.

JOINT VENTURE COMPANY –

Foreign investor to contribute capital and engineering capabilities. Indian developer to contribute land and local resources.  Both partners have joint ownership of project specific SPV. 

JOINT DEVELOPMENT AGREEMENT –

Foreign investor sets up Indian presence and undertakes development activity.  Indian partner contributes land and receives deferred consideration in terms of share of development or share of revenues. 

Tax Effect on Real Estate

1. Industrial parks:

a.       10 year tax holiday (in a block of 15 years) on profits derived from developing, developing & operating, maintaining & operating industrial parks in India, developed before March 31, 2006;

b.      Tax holiday available subject to obtaining Government approval under Industrial Park Scheme, 2002 & subsequent notification by Central Board of Direct Taxes.

2. Special Economic Zones

a.       10 year tax holiday (in a block of 15 years) on profits derived from developing; SEZ’s in India, notified on or after April 1, 2005 (as per SEZ Bill 2005);

b.      Tax holiday available subject to obtaining Letter of Permission from Board of Approvals in the Ministry of Commerce and notification by Central Government.

3. Housing projects

a.       Income tax holiday available to housing projects approved by local authority before      March 31, 2007;

b.      Construction of project to be completed within 4 years from end of financial year in which approval is obtained;

c.       Residential unit should have maximum built up area of 1,000/ 1,500 sq ft (based on city of location);

d.      Project should be on a plot of land which has minimum area of 1 acre;

e.      Built up area of shops & other commercial establishments included in housing project not to exceed 5% of aggregate built up area of housing project or 2,000 sq ft, whichever is less.

4. Section 10(23G)

a.       Income from dividends, interest and long term capital gains by companies/ trusts from investments in shares/ long term finance (more than 5 years), of specified infrastructure development companies (eg engaged in industrial parks, hotels, housing projects, etc) is tax exempt;

b.      However, MAT may apply on such income of investors;

c.       In order to claim above exemption, the project company should be notified by CBDT.

5. Section 115O

a.       Domestic companies declaring dividend liable to pay dividend distribution tax (‘DDT’);

b.      DDT is in addition to regular corporate tax payable by companies.

Sec 80C - Be smart and Save smart

CA Maneet Pal

09810774806

http://www.capasricha.com/

Income Tax Act 1961 Section 80C

Income tax is being made obligatory by the Government of India on taxable incomes of individuals, Hindu Undivided Families (HUFs), companies, firms, Co-operatives societies and trusts. The Income Tax department of India has the authority to charge such taxes on various each of the above. It is governed by the Central Board of Direct Taxes (CBDT) and is a part of Department of revenue under the Ministry of Finance, Government of India.

About Section 80C

The Section 80C came into existence from 1^st April, 2006. This section allows certain incomes and expenditure to avail tax benefit as they can be exempt from the taxable income. It is a merger of section 88 and section 80CCC.

What are the benefits of Section 80C?

The government of India encourages people to invest in various schemes and policies that can enable an individual to receive tax advantage by getting a deduction on it. And getting a deduction basically means that’ll you have to pay less of charge your taxable income.

How can you take advantage of this section?

Paying lesser amount of tax basically means, say your Gross Total Income turns out to be Rs800000, this section allows you invest up to Rs100000 of your income and claim a deduction up to Rs100000. say that you invested your income up to Rs100000 and as above we know that your GTI is Rs800000, now as per this deduction you’ll have to pay tax only on Rs700000 and you get to save the Rs100000 by utilizing the amount and making smart investments and policies for your benefit. It’s like you saved tax on Rs100000 and also made some good investments for yourself!

Also how much you save depends on what bracket of tax liability does your annual income come under. The following slab of the current year will help you deduce the amount:

Income                                                                                Tax Rate

Up to 160000                                                                           0%

Up to 190000 (for women)               

Up to 240000 (senior citizen older than 65years)     

160000-500000                                                                        10%

500000-800000                                                                        20%

Above 800000                                                                          30%

The following few sources will help you save tax and also will serve as valuable saving and investment:

Life Insurance Premiums:

The amount that you pay towards life insurance premiums can be availed as a deduction under section 80C. Any amount you pay as LIC premiums for yourself, spouse or your children can be included here.

Provident Fund and Voluntary Provident Fund:

Provident fund is routinely deducted from your salary; your employers as well as you contribute to it. You can contribute a maximum amount of Rs70000 towards it. The employer’s contribution is exempt from tax and the employee’s contribution is deductible from gross total income.

National Savings Certificate

Compounded half-yearly giving an 8% interest, these are six year saving instruments. The interest accrued here is eligible for deduction under sec 80C.

Education fee of kids

Since education these days means a lot of expenditure, parents spent a lot of money on their kids’ education. You can avail this deduction on the tuition fee only and to the maximum of two children.

Housing Loan

When go for a housing loan there will be two components to it that is the principal and the interest which together is known as the Equated Monthly Installment also known as EMI. The principal amount qualifies for the tax deduction.

Unit linked Insurance Plan

Unit linked insurance plans comes with benefits of life insurance and benefits of equity investments. These have become popular among the people because they provide tax saving benefits and also give excellent return in investments.

These are few investments that’ll reap you immense tax saving benefits. Although it depends on individual to individual what type of investment they’d prefer but some are chosen by almost everybody like PF is compulsorily deducted from a salaried employees pay and LIC plans are adopted by a major population as well.

Odds of Interpretation: Human intervention required for taxing a payment as ‘fees for technical services’

CA Maneet Pal Pasricha

09810774806

capasricha@gmail.com

www.capasricha.com

Telecom industry in India is suffering from the tussle between the odds of two interpretations. In recent time’s payments for various types of technology-related transactions has been a subject matter of disagreement between taxpayer and income tax department. Telecom industry make payment’s to companies like MTNL and BSNL for availing inter-connectivity ports. These interconnectivity ports come in use when a caller make’s a call from one network (say Airtel) to another network (say Vodafone) i.e., subscribers which fall outside the specified circle of the Taxpayer, then these calls are necessarily to be routed through national long distance telecommunication carriers viz., MTNL and BSNL, which provide interconnection between the two networks.

According to the provisions of Income-tax Act “The Act”, providing any managerial, technical or consultancy services for any consideration is termed as Fees for Technical services “FTS”. Where a payment qualifies as FTS, it is subject to withholding tax i.e tax deducted at source.

Now the point of disagreement is that whether payments made by the Taxpayer to BSNL/MTNL for availing the interconnection/port access services should be subject to withholding tax as FTS.

In respect of this disagreement Delhi High Court had decided the issue in favor of the taxpayer on the basis that these services do not involve any “human interface”. The HC approved the Taxpayer contention that the term ‘technical’ needs to be interpreted in light of the words ‘managerial’ and ‘consultancy’, as it is sandwiched between in the definition of ‘FTS’ under the Income Tax Law. Assorted judgements of the various high courts and tribunals have taken a view that the expression ‘technical services’ has to be read in the narrow sense by following the rule of “Noscitur a sociis” i.e., questionable meaning of a word can be derived from its association with other words.

Thus an element of human intervention is essential for providing managerial and consultancy services and consequently, by applying a similar equivalence, the term ‘technical’ would also have to be construed as involving a human element. This judgement gave any new perspective to the definition of Fees for technical services.

On bringing the matter before the Honourable Supreme court, the court first analysed the evidence’s to construct that human element is involved in the process of interconnectivity ports. But unfortunately or fortunately supreme court found no expert evidence from the tax authority’s to show how human intervention takes place in the present process blueprint. Expert evidence is required to decide whether there is any manual intervention involved during the traffic of such calls. Thus, whether at any stage, any human intervention is involved needs to be examined based on the technical evidence from technical experts. This would enable appellate authorities to decide the legal issue based on factual basis.

Therefore, keeping in mind the importance of the case and the implication of the issue, the matter was remitted to the tax Authority to decide the issue after examining technical experts within a period of four months. Such experts would be cross-examined. The taxpayers are also at liberty to examine the experts and adduce any other evidence. Till such time, the tax administrative authority was asked to issue directions to all its officers that in such cases, the Tax Authority would not proceed against other taxpayers only on the basis of agreements placed before them. Once the issue is settled, the tax authority would be able to levy both interest and penalty on such transactions based on the outcome of the issue.

On remitting the matter to the tax authority to determine the element of human intervention, the SC appears to have acknowledged the fact that human intervention is necessary for a technical service to qualify as FTS.

This interpretation should be of great relevance to telecom companies because when it comes to interconnectivity port charges, the telecom companies need to pay not only to domestic companies but also to the foreign companies for such services. The telecom companies pays interconnectivity charges to domestic companies for providing national long distance calls and similarly for providing International calls services they make some payment to foreign companies like AT&T etc. In addition, number of India’s tax treaties also uses a similar definition for FTS. Therefore for such cross-border technology related payments the issue of determining the applicability of withholding tax on cross-border service fee payments become of huge importance.

Now the telecom companies eagerly wait for the judgement day on the matter. The faith of the matter is in the hands of technical experts. In end, we should hope that our technical experts don’t suffer with any odds of engineering view’s like we suffer from odds of interpretation in income tax act.