L Badri Narayanan and Amar Gahlot analyse what the budget means for business.

The government has been fairly active over the past year liberalizing certain sectors and implementing other business-friendly schemes. Its drastic demonetization move dominated headlines as efforts to streamline economic policy and curb black money took centre stage. The 2017-18 budget is in line with government’s drive to achieve some of its economic and political aims. The key provisions, and what they mean for business, are outlined below.

THIN CAPITALIZATION RULE

To align India with the recommendations of the Organization for Economic Cooperation and Development on base erosion and profit shifting, the government proposes to introduce thin capitalization rules in the income tax regime. The proposed amendment limits tax deduction for interest paid on loans obtained from associated enterprises to 30% of EBITDA (earnings before interest, tax, depreciation and amortization).

The government also proposes to extend the anti-abuse rule to loans obtained by an Indian company or a permanent establishment of a foreign company from any lender (including a financial institution) not forming part of multinational company (MNC) group where the loan is either guaranteed (explicitly or implicitly) or is secured by a corresponding deposit in any manner. The interest payment disallowed can be carried forward and set off in subsequent years, subject to certain limitations. The provision, however, will not apply to a bank or insurance company.

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L BADRI NARAYANAN is a partner at Lakshmikumaran & Sridharan, where AMAR GAHLOT is a principal associate.