It is proposed to introduce new section 94B to restrict interest deduction claimed by Indian company or permanent establishment of foreign company in India in respect of debt issued by non-resident associated enterprise exceeding 30% of earnings before interest, taxes, depreciation and amortisation (EBITDA) of borrower enterprise.

Such elongation of repayment period does, in substance, convert debt into funds available for long term benefit, equity under the mask of debt.

Since India is a developing country, the rates of tax are higher than the developed countries.

Thereby, there is motive for multinational groups to infuse funds in form of debt instead of equity.

Multinational groups strategize their financing arrangements to create tax-efficient mixture of debt and equity in borrowing jurisdiction wherein interest expense can be claimed as deduction in computation of tax profits and lending jurisdictions that either exempts interest income from tax or interest taxed at lower rates.

Further, enterprises in developed countries borrow funds at lower interest rates and lend the same to their associated enterprises in other tax jurisdiction at higher interest rates to take advantage of interest arbitrage opportunities.

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