Union Budget 2023-24 + FINANCE Bill, 2023

F. Rationalisation of Provisions

Excluding non-banking financial companies (NBFC) from restriction on interest deductibility

Section 94B of the Act provides restriction on deduction of interest expense in respect of any debt issued by a non-resident, being an associated enterprise of the borrower. It applies to an Indian company, or a permanent establishment of a foreign company in India, who is a borrower. If such person incurs any expenditure by way of interest or of similar nature exceeding one crore rupees which is deductible in computing income chargeable under the head "Profits and gains of business or profession", the interest deductible shall be restricted to the extent of 30% of its earnings before interest, taxes, depreciation and amortisation (EBITDA). Proviso to this section brings within its scope certain debt issued by a lender who may not be an associated enterprise of the borrower.

2. This section was inserted in the Act vide Finance Act, 2017 in order to implement the measures recommended in final report on Action Plan 4 of the Base Erosion and Profit Shifting (BEPS) project under the aegis of G-20 - OECD countries to address the issue of base erosion and profit shifting by way of excess interest deductions.

3. Sub-section (3) of this section excludes certain companies that are engaged in the business of banking or insurance from its scope.

4. Representations have been received stating that certain Non- Banking Financial Companies [NBFCs] which are engaged in the business of financing should also be excluded from the scope of this section as they are undertaking the similar functions and are now being subject to similar regulations and compliances in respect of those functions.

5. In view of the above, it is proposed to amend sub-section (3) of section 94B of the Act to provide a carve out to certain class of NBFCs and to provide that nothing contained in sub-section (1) of section 94B of the Act shall apply to,-

(i) an Indian company or a permanent establishment of a foreign company which is engaged in the business of banking or insurance; or

(ii) such class of non-banking financial companies as may be notified by the Central Government in the Official Gazette in this behalf;

6. It is also proposed to provide that for the purposes of this section, “non-banking financial company” shall have the same meaning as assigned to it in clause (vii) of the Explanation to clause (viia) of sub-section (1) of section 36 of the Act.

7. This amendment will take effect from 1st April, 2024 and will accordingly apply to assessment year 2024-25 and subsequent assessment years.

[Clause 47]

 

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Full Text:

Union Budget 2023-24 + FINANCE Bill, 2023

Interest deduction limitation: proposed carve-out to exclude specified NBFCs from restrictions on interest deductibility under the Act. The Finance Bill proposes to amend the exclusion from the interest deductibility restriction so that nothing in sub section (1) shall apply to: (i) companies engaged in banking or insurance; or (ii) such class of non banking financial companies as may be notified by the Central Government, with 'non banking financial company' adopting the Act's established definition and the amendment effective from 1 April 2024.