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13.2. Thin-capitalization and other Restrictions to Interest Deduction

Thin capitalization rules were introduced effective from 1 July 2019 and were made applicable to all taxpayers except banking and insurance companies. As per the general provisions, the net interest expense is limited to 30% of taxable income or earnings before interest, tax, depreciation, and amortization (EBITDA). The excess interest expense may be carried forward and deducted from taxable income for up to three years (ten years for mining companies and IFSC companies).

Effective from 1 July 2019, the provision in respect of disallowance of interest deduction in respect of foreign-controlled resident mining company has been repealed. Previously, in case of such companies, where a foreign debt-to-equity ratio was in excess of 3:1 at any time during the year of assessment, the amount of interest paid by the resident company during that year on that part of the debt exceeding the ratio was disallowed as a deduction, and the amount so disallowed was taxed as dividend.

In case of an IFSC company, where an amount of foreign debt interest is allowable as a deduction in a particular tax year and, at any time during that tax year, the total foreign debt exceeds the foreign equity for that year, then the amount of foreign debt interest ascertained in accordance with the following formula is disallowed:

I x (A/B) x (C/365)

A = amount of the excess of the total foreign debt over the foreign equity product.

B = the total foreign debt.

C = the number of days in that tax year during which the total foreign debt exceeded the foreign equity product by that amount.

I = the foreign debt interest.