Cut in ECB withholding tax rate will make difference: PwC

Ketan Dalal, jont Leader-Tax and Regulatory Services at PwC, says that from a lender perspective the issue is whether the he is willing to take the risk and from the borrowers standpoint whether he sees the need for borrowing. Just a cut in withholding tax rate may not necessarily lend both borrower and the lender to resort to more transaction.
 
Even after liberisation of ECB regulations there are restrictions on the end users. The cut in withholding tax rate from 20% to 5% will make some difference but one need to study what the conditions are. But if the conditions are satisfied and subject to commercial and regulatory issues then it will make some difference.

Below is the edited transcript of his interview to CNBC-TV18. Q: Do you think it will make a sea change in how much external commercial borrowing (ECB) companies want to access or not necessarily?
A: There are three dimensions to cross boarder borrowing especially with volatile foreign exchange rates. First, commercially, from a lender perspective the issue is whether the he is willing to take the risk and from the borrowers standpoint whether he sees the need for borrowing. Just a cut in withholding tax rate may not necessarily lend both borrower and the lender to resort to more transaction.
Second, although there has been liberalization in the ECB regulations which came on July 2, there are restrictions on end users for e.g. one cannot borrow cross boarder for general corporate purposes or for the repayment of loans and both of these currently are the need of the hour. So there are regulatory constraints as well.
Third, the lenders do tend to factor in the withholding tax and to some extent pass on the higher cost to the Indian corporate. Yes, the cut in withholding tax rate from 20% to 5% will make some difference but one need to study what the conditions are. But if the conditions are satisfied and subject to commercial and regulatory issues then it will make some difference. Q: What is your view on the RBI nod that was required for availing of the low tax rate? Did that confused you?
A: Section 194LC provides that it is either approved bonds or under a loan agreement approved by the central government. So the dispensation of the ecosystem around that approval is not out yet so it is difficult to comment.
So far as the RBI regulations today are concerned, divorced of withholding tax there are two windows of borrowing; one is called the automatic route and other is the approval route.
So majority of ECB would go under the automatic route which essentially means that if you are within the parameters of what is stated by the RBI in terms of minimum maturity period which is three years in some cases and five years in other cases if the interest rate does not exceed Libor + 350 or 500 bps depending on the maturity of the loan etc and if you satisfy end use criteria then you do not require RBI nod.
So I think these are two separate baskets and I am not sure how they are going to converse. One has to check the notification what it states. But I hope that it is not very complicated in terms of approval processes because that type of barrier itself can cause a deterrent to taking such a loan. Q: What have you made of the recent noises from the new FM on a review of the retrospective tax laws, relooking at GAAR etc, are you hopeful or you want to see the fine print of any kind of concrete action before passing judgment?
A: One needs to look at the fine print and what translates on the ground. But I am encouraged with FM's yesterday statement that the retrospectivity is being relooked.  It is a strong signal that the government is willing to relook at things and set things in place when things have not gone in the right direction. If things move in right direction then it will restore confidence of both domestic and international investors.
Confederation of Indian Industry (CII) has also suggested deferment of GAAR. In todays environment we need to look at more important issues around the economy and setting the overall ecosystem right. Situation like GAAR can wait especially given the amount of time it takes to resolve disputes in India; this single provision can lead to a significant amount of increase in litigation and that’s the last thing we need today. Q: What is a reasonable or practical expectation to have on this. Is the first on this only at the end of the report submission in August from the panel which the Prime Minister has setup or do you think on the retrospective tax laws you might see action in the next few weeks or some announcement?
A: I think the latter. As far as the GAAR panel is concerned, although one can sense that the mandate of the GAAR panel has been expanded beyond GAAR. As far as the retrospectivity is concerned, one is likely to see some announcements sooner rather than later and I am not sure that one will have to wait for the GAAR report. From yesterday's comment one is hopeful that indication looks to move in that direction.