In the exercise of the powers conferred by paragraph 154(1)(ed) of the Income Tax Act 1967 [Act 53], the Minister, on January 31, 2022, gazetted the Income Tax (Restriction on Deductibility of Interest) (Amendment) Rules 2022 (P.U. (A) 27/2022) ("Amendment Rules") to amend the Income Tax (Restriction on Deductibility of Interest) Rules 2019 [P.U. (A) 175/2019] (“Principal Rules”).
It came into effect on February 1, 2022.
For taxpayers who have been granted financial assistance in a controlled transaction, the Principal Rules, among other things, restrict the amount of interest that can be deducted.
In this context, as specified in section 140C(3) of the Income Tax Act of 1967 (hereafter referred to as "the Act"), the term "controlled transaction" refers to the following types of financial assistance:
between persons, one of whom has control over the other; or
between persons, both of whom are controlled by some other person.
"Financial Assistance" includes loans, interest-bearing trade credit, advances, debt or the provision of any security or guarantee;
"Interest Expense" means—
interest on all forms of debt; or
payments economically equivalent to interest (excluding expenses incurred in connection with the raising of finance).
The Principal Rules are amended in two different ways by the Amendment Rules, both of which are detailed further below:
1. Qualifying deduction
Under Rule 4, the maximum amount of interest referred to in section 140C of the Act shall be an amount equal to 20% of the amount of tax-EBITDA of that person from each of his sources consisting of a business for the basis period of a year of assessment.
According to Rule 5, the total amount of the "qualifying deduction" allowed is one of the components that goes into the calculation of the amount of "tax-EBITA."
The Amendment Rules replace the definition of ‘qualifying deduction’ in the Principal Rules with the following:
2. Carrying forward of excess interest
Rule 6(1) of the Principal Rules, which allows a company to carry forward any interest expense exceeding the amount ascertained under rule 4 to subsequent years of assessment, has expanded its scope. It now applies to any person, including a company, a limited liability partnership, a corporation sole, and a body of persons (i.e. any unincorporated body of persons including a Hindu joint family but excluding a partnership).
Previously, this provision only applied to companies.
Rule 6(2) of the Principal Rules imposes a condition (i.e. the shareholding of the company) that restricts the carrying forward of excess interest.
The Amendment Rules have clarified that this condition only applies to a company and does not apply to other persons permitted under rule 6(1) to carry forward excess interest.
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