Anindita Dey & Ujjal K Basu Roy

Mumbai, June 14: State-run banks need not pay withholding tax on syndication of external commercial borrowings (ECBs) for their corporate clients if the same is to be raised through their own overseas branches.

According to state-run bankers, this is as per the legal opinion sought by these banks who are active in loan syndications and commercial borrowings. However, there has not been any official clarification in this regard by the tax authorities. This assumes significance in the light of the fact that as per the last budget announcement, section 10(15)(iv) which used to exempt corporates from paying the withholding tax, was withdrawn. Accordingly, these corporates had to pay the tax while raising foreign currency loans under ECB route, thus making the route quite expensive.

However, according to legal opinion, as per section 194(A), if a resident Indian bank has a branch abroad and the bank arranges a foreign currency loan through its own foreign branch on behalf of their corporate clients, it need not pay the withholding tax on the ECB raised.

However, as per the opinion, this exemption will be allowed only if the Indian bank has a branch and not any other entity like a representative or associate. This is because the overseas branch will be treated as a resident branch and not as a foreign entity. Therefore, once an entity is not treated as a foreign entity but as a resident branch, the question of paying withholding tax does not arise, said senior PSU bankers under conditions of anonymity.

To be precise, those corporates who are dealing with an Indian bank having a branch abroad through which the foreign currency loan is raised, such corporates need not pay the withholding tax, thus making it much cheaper.

This means that the cost of the ECB is at the same level as it was before June 1, after which the exemption was withdrawn. On the other hand, those corporates dealing with foreign banks will have to pay the tax.