Clause 393 Tax to be deducted at source.

Income Tax Bill, 2025

Introduction

The deduction of tax at source (TDS) on interest payments to non-residents has been a pivotal aspect of India's international taxation regime, serving both as a revenue collection mechanism and as an instrument for incentivizing foreign investment in specific sectors. Section 194LC of the Income Tax Act, 1961 was introduced to facilitate lower TDS rates on interest payments to non-resident lenders and bondholders, particularly for borrowings in foreign currency and for certain classes of bonds. With the introduction of the Income Tax Bill, 2025, Clause 393(2) seeks to consolidate and rationalize the TDS provisions, including those previously covered u/s 194LC, with some modifications and clarifications. This commentary provides a detailed analysis of Clause 393(2), focusing on Table S. No. 2, 3, and 4, and compares these with the existing Section 194LC, examining the legislative intent, structural changes, practical implications, and potential issues.

Objective and Purpose

The legislative intent behind Section 194LC was to provide concessional TDS rates on interest payments to non-residents, thereby encouraging external commercial borrowings (ECBs), issuance of long-term infrastructure bonds, and, more recently, rupee-denominated bonds (Masala Bonds). The policy rationale was to channel foreign debt into India's infrastructure and corporate sectors by making such borrowings more cost-effective for Indian companies and business trusts. The Income Tax Bill, 2025, through Clause 393(2), aims to streamline the TDS provisions, remove overlaps, and introduce greater clarity, while also adjusting the scope and rates in line with evolving policy objectives and international best practices.

Detailed Analysis of Clause 393(2) [Table: S. No. 2, 3 & 4] of the Income Tax Bill, 2025

Clause 393(2) [S.No. 2]: Interest on Foreign Currency Borrowings and Bonds (Pre-July 2023)

Provision:

This item covers income by way of interest payable in respect of monies borrowed in foreign currency from a source outside India:

• Under a loan agreement or issue of long-term infrastructure bond on or after 1 July 2012 but before 1 July 2023; or
• By way of issue of any long-term bond on or after 1 October 2014 but before 1 July 2023,
• Provided such borrowing is approved by the Central Government.

The TDS rate prescribed is 5%, and the payees are any non-resident (not being a company) or a foreign company, with the payer being any Indian company or a business trust.

Interpretation:

This provision closely mirrors the original and expanded scope of Section 194LC, providing a concessional TDS rate for interest on borrowings made in foreign currency during the specified periods. The requirement for Central Government approval ensures that only qualifying borrowings, typically for infrastructure or other priority sectors, benefit from the reduced rate.

Ambiguity/Potential Issues:

The provision is clear in its temporal scope, but questions may arise regarding the treatment of refinancing, rollovers, or modifications of existing loans after the cut-off date. The requirement for government approval may introduce administrative complexity, especially for bonds issued in international markets.

Clause 393(2) [S.No. 3]: Interest on Rupee Denominated Bonds (Pre-July 2023)

Provision:

This item covers interest payable in respect of monies borrowed from a source outside India by way of issue of rupee denominated bonds (RDBs), provided such bonds are issued before 1 July 2023. The TDS rate is 5%, with the same payee and payer as above.

Interpretation:

This provision is designed to encourage the issuance of RDBs, also known as "masala bonds", by Indian companies and business trusts to foreign investors. By offering a concessional TDS rate, the provision seeks to promote the development of a robust offshore rupee bond market, diversify sources of funding, and reduce currency risk for Indian issuers.

Ambiguity/Potential Issues:

The provision is time-bound, covering only bonds issued before 1 July 2023. The treatment of interest on RDBs issued prior to this date but paid after, or of secondary market transactions, may require clarification. The absence of a requirement for government approval (unlike S.No. 2) simplifies compliance.

Clause 393(2) [S.No. 4]: Interest on Bonds Listed in IFSCs (Post-April 2020)

Provision:

This item covers interest payable in respect of monies borrowed from a source outside India by way of issue of any long-term bond or rupee denominated bond, which is listed only on a recognised stock exchange in an International Financial Services Centre (IFSC). The TDS rates are:

• 4%, where issued on or after 1 April 2020 but before 1 July 2023;
• 9%, where issued on or after 1 July 2023.

Again, the payees are any non-resident (not being a company) or a foreign company, and the payers are Indian companies or business trusts.

Interpretation:

This provision incentivizes the listing of Indian debt instruments in IFSCs, such as GIFT City in Gujarat, by offering a further reduced TDS rate of 4% for bonds issued within the specified window. Post 1 July 2023, the rate increases to 9%, reflecting a policy shift to phase out concessional rates while still providing a differential for IFSC-listed instruments.

Ambiguity/Potential Issues:

The dual-rate structure may create complexity for issuers and investors, especially regarding the treatment of interest on bonds straddling the cut-off dates. The requirement that the bonds be listed "only" on a recognised IFSC exchange may preclude dual listings and could limit marketability. The rationale for the sharp increase to 9% post-July 2023 may be questioned from a policy perspective.

Comparative Analysis with Section 194LC of the Income Tax Act, 1961

Structure

Section 194LC provides for TDS on interest payments made by specified companies or business trusts to non-residents or foreign companies.

The salient features are:

• Interest eligible for the concessional TDS rate must be payable in respect of monies borrowed from a source outside India, either under a loan agreement, by issue of long-term infrastructure bonds, or by issue of rupee denominated bonds, within specified time frames, and as approved by the Central Government.
• The rates are as follows:
  • 5% for most eligible borrowings (default rate).
  • 4% for interest on bonds (including rupee denominated bonds) issued on or after 1st April 2020 but before 1st July 2023, listed on a recognised stock exchange in an IFSC.
  • 9% for interest on such bonds issued on or after 1st July 2023, listed on a recognised stock exchange in an IFSC.
• There are specific definitions for "foreign currency", "specified company", "IFSC", and "recognised stock exchange".
• The concessional rate applies only to the extent of interest calculated at the rate approved by the Central Government.

Structural and Substantive Parity

Both Clause 393(2) and Section 194LC are aligned in terms of their core objectives and mechanics. The following parallels are evident:

• Both provisions apply to interest payable by an Indian company or business trust to a non-resident (not being a company) or a foreign company.
• Both specify concessional TDS rates for interest on borrowings in foreign currency, issue of long-term infrastructure bonds, and rupee denominated bonds, subject to Central Government approval and within defined time windows.
• The rate structure (5%, 4%, 9%) and the cut-off dates are consistent across both provisions.
• Both require deduction of tax at the time of credit or payment, whichever is earlier.

Key Differences and Clarifications

1. Presentation and Accessibility:
   • Clause 393(2) presents the TDS provisions in an integrated table format, making the applicability, rates, and payer/payee relationships more transparent and user-friendly. Section 194LC, by contrast, is more text-heavy and requires cross-referencing for applicability and rate determination.
2. Scope and Definitions:
   • While the substance is largely identical, Clause 393(2) does not repeat the definitions of "foreign currency", "specified company", "IFSC", and "recognised stock exchange" within the clause itself, presumably relying on the general definitions in the new Bill or cross-references elsewhere. Section 194LC includes these definitions within the section for clarity.
3. Time Frames and Transitional Provisions:
   • Both provisions have identical cut-off dates for eligibility (e.g., borrowings before 1st July 2023 for most instruments; different rates for bonds listed in an IFSC depending on issuance date).
   • However, Clause 393(2) may be interpreted as a prospective provision, applying only to payments made after the Bill comes into effect, while Section 194LC applies to payments made for borrowings within the specified windows, even if the payment occurs after those windows, unless specifically excluded.
4. Scope of Approval:
   • Both require Central Government approval for the concessional rate to apply, but Clause 393(2) does not elaborate on the process or criteria for such approval, while Section 194LC refers to approval "in this behalf". This may require further clarification in the rules under the new Bill.
5. Interest Calculation:
   • Section 194LC expressly limits the concessional rate to interest "not exceeding the amount of interest calculated at the rate approved by the Central Government". Clause 393(2) does not explicitly restate this limitation in the table, but the underlying principle is likely to be retained by cross-reference or by general application of the Act's provisions.
6. Omission of Certain Details:
   • Section 194LC refers to "specified company", which is defined as an Indian company. Clause 393(2) refers to "any Indian company or business trust", which is a broader and potentially more inclusive formulation, but may require alignment with existing definitions to avoid interpretive disputes.
7. Rate Change for IFSC Bonds:
   • Both provisions introduce a higher TDS rate (9%) for bonds issued on or after 1st July 2023, listed in an IFSC, replacing the earlier concessional rate of 4%. This reflects a policy shift to gradually roll back the concessional regime for newer issuances, while protecting legacy investments.

Practical Implications

A. For Indian Companies and Business Trusts

• The consolidation of TDS provisions under Clause 393(2) simplifies compliance, especially for entities with multiple types of borrowings and investors. The tabular format aids quick reference and reduces the risk of inadvertent non-compliance due to misinterpretation.
• For ongoing borrowings, careful attention must be paid to the cut-off dates and the nature of the instrument to determine the applicable TDS rate. For instance, a rupee denominated bond issued before 1st July 2023 but listed in an IFSC will continue to enjoy the lower rate, but new issuances post 1st July 2023 will attract the higher rate.
• The requirement for Central Government approval (where applicable) remains a critical compliance step; failure to obtain such approval may result in denial of the concessional rate and exposure to higher TDS.

B. For Non-Resident Investors

• Non-residents benefit from the certainty and transparency of the concessional TDS regime, which reduces the tax cost of lending to or investing in Indian companies.
• The rate increase for bonds issued in an IFSC on or after 1st July 2023 may affect the attractiveness of such instruments for new investors, potentially impacting the pipeline of foreign debt capital through this route.
• Investors must ensure that the underlying instrument and the timing of their investment fall within the eligible windows to avail the lower TDS rates.

C. For Tax Authorities

• The consolidation of TDS provisions enhances administrative efficiency and reduces interpretational disputes.
• The clarity regarding rates and cut-off dates aids in audit and enforcement, but the absence of detailed definitions within the clause may require reference to supplementary rules or notifications.

 Ambiguities and Potential Issues

• The reliance on external definitions for key terms (e.g., "foreign currency", "business trust", "IFSC") in Clause 393(2) may create interpretational gaps unless the new Bill or subordinate legislation provides comprehensive cross-references.
• The process and criteria for Central Government approval are not detailed in Clause 393(2); clarity in rules or notifications will be essential to avoid administrative bottlenecks.
• Transitional issues may arise for borrowings or bonds straddling the cut-off dates, especially if the Bill's commencement date does not coincide with the end of the eligibility window u/s 194LC.
• The higher TDS rate (9%) for post-1st July 2023 IFSC bonds may lead to disputes regarding the date of "issuance" and the listing status, particularly for instruments with complex structuring.

Conclusion

Clause 393(2) [Table: S. No. 2, 3 & 4] of the Income Tax Bill, 2025, as it relates to TDS on interest payments to non-residents, represents a continuation and rationalization of the policy framework established by Section 194LC of the Income Tax Act, 1961. The consolidation, tabular presentation, and alignment of rates and cut-off dates enhance clarity and compliance, while also signaling a gradual recalibration of incentives for foreign debt capital. Stakeholders must be vigilant regarding eligibility criteria, timing of issuances, and procedural requirements to fully avail the concessional regime. The ultimate effectiveness of Clause 393(2) will depend on the precision of definitions, the transparency of the approval process, and the seamless transition from the old to the new regime. Judicial or administrative clarification may be required on issues of interpretation, especially concerning transitional arrangements and the scope of approval, to ensure the continued flow of foreign investment into India's infrastructure and corporate sectors.

Full Text:

Clause 393 Tax to be deducted at source.