{"id":298183,"date":"2023-08-01T11:00:12","date_gmt":"2023-08-01T05:30:12","guid":{"rendered":"https:\/\/www.scconline.com\/blog\/?p=298183"},"modified":"2023-08-11T17:26:36","modified_gmt":"2023-08-11T11:56:36","slug":"setting-sun-beneficial-tax-regime-for-offshore-debt-under-ecb-and-fpi-rupee-bond-routes","status":"publish","type":"post","link":"https:\/\/www.scconline.com\/blog\/post\/2023\/08\/01\/setting-sun-beneficial-tax-regime-for-offshore-debt-under-ecb-and-fpi-rupee-bond-routes\/","title":{"rendered":"Setting Sun on the Beneficial Tax Regime for Offshore Debt under the ECB and FPI-Rupee Bond Routes"},"content":{"rendered":"
\n

Introduction<\/h4>\n

Over the years India Inc. has relied upon debt funding from offshore jurisdictions through the external commercial borrowing (ECB) route and the foreign portfolio investment (FPI) route. In many instances, funding through these routes is an alternative to traditional sources of finance from Indian banks and financial institutions. Importantly, these routes are mostly insulated from the micro-economic policy decisions of the Reserve Bank of India which affect banks and financial institutions in India. End-use restrictions which govern most cases of bank lending are also not applicable especially for funding under the FPI route. These advantages coupled with the need to have diversified sources of funding make such offshore funding routes attractive to Indian borrowers. This is evident from India’s External Debt Report brought out by the Department of Economic Affairs, Ministry of Finance, wherein out of the total outstanding debt of USD 250.2 billion by non-financial corporations as at 31-3-2022, about 53% was in the form of ECB and FPI in debt securities.1<\/sup><\/a><\/p>\n

Recognising the importance of such foreign fund flows and to augment the country’s access to low-cost debt funding and advancement of certain specific sectors, the Government of India (GoI) had introduced a tax standard operating procedure (SOP) in the form of a beneficial withholding tax rate at 5% on interest income earned by non-residents on certain forms of offshore debt advanced to Indian borrowers under the ECB and the FPI routes.<\/p>\n

Regime applicable until 1-7-2023<\/h4>\n

The GoI first introduced the beneficial withholding tax rate of 5% for interest income derived by non-residents on certain forex loans advanced under the ECB regime; and thereafter, in order to provide a more broad-based incentive and encourage investment in the debt market by foreign portfolio investors (FPINs), the benefit of the lower withholding tax rate was extended to interest income received by FPINs on certain specified securities.<\/p>\n

Hence:<\/p>\n

1. In the context of the ECB regime, a beneficial withholding tax rate of 5% was introduced for forex borrowings availed by Indian companies, Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs) under a loan agreement entered into prior to 1-7-2023 or by way of issue of any long-term bonds (including long-term infrastructure bonds) prior to 1-7-2023.<\/p>\n

2. In the context of the FPI regime, the lower withholding tax rate of 5% was introduced for interest income received by FPINs on rupee denominated bonds (essentially non-convertible debentures (NCDs) issued by the Indian companies (FPI-NCDs) and the government securities.<\/p>\n

The beneficial tax rate under each regime was available subject to satisfaction of prescribed conditions, the key one being a cap on the interest coupon (as notified by the GoI). Importantly, such beneficial rates were originally introduced (in 2012 to 2014) with an expiry date of June\/July 2015. Such sunset period was periodically extended in the Union Budget preceding the sunset date, last extension being under the Union Budget 2020 \u2014 wherein the date was extended to 1-7-2023.<\/p>\n

However, although expected, the sunset date has not been extended further in the Union Budget 2023 and hence, such beneficial tax regime is no longer available with respect to interest income on ECBs availed on or after 1-7-2023 onwards, as well as for interest income on FPI-NCDs and these shall be taxable as per the general tax rates prescribed under the domestic law.<\/p>\n

Position after 1-7-2023 \u2014 Impact analysis<\/h4>\n

In terms of loans made under the ECB regime, 5% tax rate shall continue to apply for all borrowings made under loan agreements entered into or long-terms bonds2<\/sup><\/a> issued prior to 1-7-2023; and hence interest on borrowings or drawdowns prior to 1-7-2023 shall be grandfathered and 5% tax rate shall continue to be available even if such interest payments are made after 1-7-2023. However, as far as FPI-NCDs are concerned, any interest payments on or after 1-7-2023 shall no longer qualify for 5% tax rate even if the NCD has been issued prior to 1-7-2023.<\/p>\n

The tax cost under Indian domestic law shall now be significantly higher i.e., 20% for foreign currency ECBs and FPI-NCDs (provided such NCDs qualify as a \u201csecurity\u201d as defined under Indian securities law). However, such 20% tax rate can be reduced under a tax treaty (entered between the jurisdiction of tax residency of the lender and India). The India-USA, India-UK and India-Singapore tax treaties cap the withholding tax rate on interest at 15%; whereas a slightly lower tax rate is available under the India-UAE tax treaty (12.5%). India’s tax treaties with several EU jurisdictions cap the withholding tax rate at 10% (such as Luxembourg and Ireland, etc.) and the India-Mauritius treaty provides for a further reduced tax rate of 7.5%. To be noted, that treaty eligibility is not automatic and is subject to fulfilment of conditions prescribed under the Indian domestic law as well as the relevant tax treaty (this being a matter of factual and legal analysis) and hence, it would be expected that the Indian borrower would typically require the lender to provide some comfort (say in the form of declarations, etc.) in relation to the lenders eligibility of tax treaty benefits, if such treaty relief is sought to be claimed by the offshore lender.<\/p>\n

In terms of industry practice, under the previous regime (applicable prior to 1-7-2023) given the lower withholding tax rate of 5% (subject to satisfaction of certain basic conditions); tax gross-up clauses in the facility or investment agreements were fairly common wherein the Indian borrowers commercially agreed to bear the India taxes of the lender and accordingly gross-up interest payments made to the overseas lender to that extent. There was little resistance to such conditions being incorporated in the loan agreements since it made commercial sense for the borrowers to borrow under the ECB and FPI routes despite having to bear the additional cost. Accordingly, such clauses were more or less considered as market standard. The higher tax rates now applicable, could impact the commercial terms and the industry practice regarding such tax gross-up arrangements as the borrowers will have to accordingly account for the increased tax rates which will significantly increase their cost of borrowing which.<\/p>\n

Alternate debt routes \u2014 Bonds listed on the Indian Stock Exchange<\/h4>\n

The India International Exchange (IFSC) Limited (India INX) has been established in the IFSC Gujarat International Finance Tec-City (Gift City) and has been positioned as an alternative to the Singapore Stock Exchange and the London Stock Exchange. While the tax relief offered to offshore bonds listed on the Singapore Stock Exchange, and the London Stock Exchange has been withdrawn from 1-7-2023, a more concessional tax rate of 4% was introduced in the year 2020 in respect of forex borrowings availed by the Indian borrowers on issuance of long-term bonds or rupee denominated bonds which are listed only on a the first international stock exchange located in the Gift City, i.e. the India INX. Although such tax rates have been increased to 9% in the last Union Budget, it nevertheless remains to be a more viable option than listing of bonds on the Singapore Stock Exchange or the London Stock Exchange.<\/p>\n

That said, long-term bonds issued under the current regime (i.e. applicable up to 1-7-2023) were often listed on foreign stock exchanges to exploit higher liquidity and greater market access; and whether practically, the same traction would be attracted in case of bonds listed on the India INX would interesting to watch out for. Keeping in mind that bonds only worth USD 124.7 bn3<\/sup><\/a> have been listed on the IFSC stock exchanges as on May 2023, it may take some time to bring the India INX at par with the London Stock Exchange or the Singapore Stock Exchange.<\/p>\n

Conclusion<\/h4>\n

Several non-resident lenders\/financial institutions have been routinely entering into such debt arrangements with Indian borrowers and hence the end to the concessional tax regime is likely to significantly impact the overall return to such foreign lenders or cost to the Indian borrowers (where such borrowers bear the lender’s tax cost). Interestingly, with the phasing out of the beneficial tax regime for such ECBs and FPI-NCDs, it seems that the GoI is seeking to provide a parallel boost to borrowings out of Gift City.<\/p>\n

While the removal of the concessional tax rate may be a step in the direction of providing an impetus to establish IFSC Gift City as a financial hub, it may have a short to medium term impact as borrowers will have to rethink their borrowing policies since access to offshore markets will turn more expensive. This may also increase the pressure on domestic markets as more borrowers will turn to Indian banks and financial institutions for their funding needs.<\/p>\n

\n<\/div>\n

\u2020 Partner, Khaitan & Co. (Banking Finance & Debt Capital Market)<\/span><\/strong><\/p>\n

\u2020\u2020 Partner, Khaitan & Co. (Tax)<\/span><\/strong><\/p>\n

\u2020\u2020\u2020 Principal Associate, Khaitan & Co (Tax)<\/span><\/strong><\/p>\n

1.<\/a> Ministry of Finance, Government of India, India’s External Debt \u00e2\u20ac\u201d A Status Report (2021-22) August 2022, available at <India’s External Debt – A Status Report 2021-22.pdf (dea.gov.in)<\/a>>.<\/p>\n

2.<\/a> \u201cLong-term\u201d bonds mean bonds having an original maturity of 3 years or more.<\/p>\n

3.<\/a> Ministry of Power, Government of India, Press Information Bureau, REC Limited Lists its Green Bonds of USD 750 Million at GIFT IFSC Stock Exchanges, 3-5-2023, available at <Press Information Bureau (pib.gov.in)<\/a>>.<\/p>\n","protected":false},"excerpt":{"rendered":"

by Manisha Shroff\u2020 Ritu Shaktawat\u2020\u2020, and Sneh Shah\u2020\u2020\u2020
\nCite as: 2023 SCC OnLine Blog Exp 64<\/p>\n","protected":false},"author":8808,"featured_media":298184,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[20271,47404],"tags":[59886,46260,56020,43680,59887,32067,59888,29871,2824,29870],"class_list":["post-298183","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-experts_corner","category-khaitan-co","tag-beneficial-tax-regime","tag-experts-corner","tag-external-commercial-borrowings","tag-financial-institutions","tag-foreign-portfolio-investment","tag-government-of-india","tag-indian-banks","tag-infrastructure-investment-trusts","tag-Ministry_of_Finance","tag-real-estate-investment-trusts"],"yoast_head":"\nSetting Sun on the Beneficial Tax Regime for Offshore Debt under the ECB and FPI-Rupee Bond Routes | SCC Times<\/title>\n<meta name=\"description\" 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This Statement reviews the progress of various developmental and regulatory policy measures announced by the Reserve Bank in recent policy statements and sets out new measures to be taken for further strengthening the banking structure; broadening and deepening financial markets; extending the reach of financial services to all; and\u2026","rel":"","context":"In "Hot Off The Press"","block_context":{"text":"Hot Off The Press","link":"https:\/\/www.scconline.com\/blog\/post\/category\/news\/hot_off_the_press\/"},"img":{"alt_text":"rbi","src":"https:\/\/i0.wp.com\/www.scconline.com\/blog\/wp-content\/uploads\/2023\/05\/reserve-bank-of-india.jpg?resize=350%2C200&ssl=1","width":350,"height":200,"srcset":"https:\/\/i0.wp.com\/www.scconline.com\/blog\/wp-content\/uploads\/2023\/05\/reserve-bank-of-india.jpg?resize=350%2C200&ssl=1 1x, https:\/\/i0.wp.com\/www.scconline.com\/blog\/wp-content\/uploads\/2023\/05\/reserve-bank-of-india.jpg?resize=525%2C300&ssl=1 1.5x, https:\/\/i0.wp.com\/www.scconline.com\/blog\/wp-content\/uploads\/2023\/05\/reserve-bank-of-india.jpg?resize=700%2C400&ssl=1 2x"},"classes":[]},{"id":293155,"url":"https:\/\/www.scconline.com\/blog\/post\/2023\/05\/26\/changes-in-indias-overseas-investment-framework-addressing-the-round-tripping-dilemma\/","url_meta":{"origin":298183,"position":2},"title":"Changes in India\u2019s Overseas Investment Framework: Addressing the Round-Tripping Dilemma","author":"Bhumika Indulia","date":"May 26, 2023","format":false,"excerpt":"by Rabindra Jhunjhunwala\u2020 and Sushmita Som\u2020\u2020 Cite as: 2023 SCC OnLine Blog Exp 47","rel":"","context":"In "Experts Corner"","block_context":{"text":"Experts Corner","link":"https:\/\/www.scconline.com\/blog\/post\/category\/experts_corner\/"},"img":{"alt_text":"round-tripping dilemma","src":"https:\/\/i0.wp.com\/www.scconline.com\/blog\/wp-content\/uploads\/2023\/05\/round-tripping-dilemma.webp?resize=350%2C200&ssl=1","width":350,"height":200,"srcset":"https:\/\/i0.wp.com\/www.scconline.com\/blog\/wp-content\/uploads\/2023\/05\/round-tripping-dilemma.webp?resize=350%2C200&ssl=1 1x, https:\/\/i0.wp.com\/www.scconline.com\/blog\/wp-content\/uploads\/2023\/05\/round-tripping-dilemma.webp?resize=525%2C300&ssl=1 1.5x, https:\/\/i0.wp.com\/www.scconline.com\/blog\/wp-content\/uploads\/2023\/05\/round-tripping-dilemma.webp?resize=700%2C400&ssl=1 2x"},"classes":[]},{"id":246428,"url":"https:\/\/www.scconline.com\/blog\/post\/2021\/04\/02\/national-bank-for-financing-infrastructure-and-development-act-2021-receives-presidents-assent\/","url_meta":{"origin":298183,"position":3},"title":"National Bank For Financing Infrastructure And Development Act, 2021 receives President\u2019s assent","author":"Prachi Bhardwaj","date":"April 2, 2021","format":false,"excerpt":"The National Bank For Financing Infrastructure And Development Act, 2021 receives President\u2019s assent on March 28, 2021. The Act seeks to establish the National Bank for Financing Infrastructure and Development (NaBFID) to fund infrastructure projects in India. The salient features of the Act are discussed below. \u00a0 Establishing NaBFID: The\u2026","rel":"","context":"In "Legislation Updates"","block_context":{"text":"Legislation Updates","link":"https:\/\/www.scconline.com\/blog\/post\/category\/legislationupdates\/"},"img":{"alt_text":"","src":"https:\/\/i0.wp.com\/www.scconline.com\/blog\/wp-content\/uploads\/2021\/04\/MicrosoftTeams-image-43.jpg?resize=350%2C200&ssl=1","width":350,"height":200,"srcset":"https:\/\/i0.wp.com\/www.scconline.com\/blog\/wp-content\/uploads\/2021\/04\/MicrosoftTeams-image-43.jpg?resize=350%2C200&ssl=1 1x, https:\/\/i0.wp.com\/www.scconline.com\/blog\/wp-content\/uploads\/2021\/04\/MicrosoftTeams-image-43.jpg?resize=525%2C300&ssl=1 1.5x, https:\/\/i0.wp.com\/www.scconline.com\/blog\/wp-content\/uploads\/2021\/04\/MicrosoftTeams-image-43.jpg?resize=700%2C400&ssl=1 2x, https:\/\/i0.wp.com\/www.scconline.com\/blog\/wp-content\/uploads\/2021\/04\/MicrosoftTeams-image-43.jpg?resize=1050%2C600&ssl=1 3x"},"classes":[]},{"id":353239,"url":"https:\/\/www.scconline.com\/blog\/post\/2025\/07\/12\/aiib-iifl-home-finance-ecb-green-affordable-housing-india\/","url_meta":{"origin":298183,"position":4},"title":"SAM & Co. advises Asian Infrastructure Investment Bank on USD 100 Million ECB facility to IIFL Home Finance for affordable and green housing in India","author":"Editor","date":"July 12, 2025","format":false,"excerpt":"Shardul Amarchand Mangaldas & Co. acted as Indian legal counsel to the Asian Infrastructure Investment Bank (AIIB)","rel":"","context":"In "Law Firms News"","block_context":{"text":"Law Firms News","link":"https:\/\/www.scconline.com\/blog\/post\/category\/news\/law-firms-news\/"},"img":{"alt_text":"AIIB IIFL ECB Green Affordable Housing","src":"https:\/\/i0.wp.com\/www.scconline.com\/blog\/wp-content\/uploads\/2025\/07\/AIIB-IIFL-ECB-Green-Affordable-Housing.webp?resize=350%2C200&ssl=1","width":350,"height":200,"srcset":"https:\/\/i0.wp.com\/www.scconline.com\/blog\/wp-content\/uploads\/2025\/07\/AIIB-IIFL-ECB-Green-Affordable-Housing.webp?resize=350%2C200&ssl=1 1x, https:\/\/i0.wp.com\/www.scconline.com\/blog\/wp-content\/uploads\/2025\/07\/AIIB-IIFL-ECB-Green-Affordable-Housing.webp?resize=525%2C300&ssl=1 1.5x, https:\/\/i0.wp.com\/www.scconline.com\/blog\/wp-content\/uploads\/2025\/07\/AIIB-IIFL-ECB-Green-Affordable-Housing.webp?resize=700%2C400&ssl=1 2x"},"classes":[]},{"id":195160,"url":"https:\/\/www.scconline.com\/blog\/post\/2018\/04\/11\/sebi-issues-clarification-on-clubbing-of-investment-limits-of-foreign-govt-foreign-govt-related-entities\/","url_meta":{"origin":298183,"position":5},"title":"SEBI issues clarification on clubbing of investment limits of foreign Govt\/foreign Govt related entities","author":"Saba","date":"April 11, 2018","format":false,"excerpt":"SEBI has been monitoring investment by foreign Governments and their related entities viz. foreign central banks, sovereign wealth funds and foreign Governmental agencies registered as foreign portfolio investors (hereinafter referred to as FPIs) in India. 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