| Comprehensive
guidelines on External Commercial Borrowings introduced
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The finance ministry has virtually
clamped down on external commercial borrowings by
imposing end-use restrictions on all loans over
US $ 50 mln, reducing the interest rate spread,
making it mandatory to park unused proceeds abroad,
and making it compulsory for borrowers to hedge
green-channel foreign loans. The comprehensive guidelines
on external commercial borrowings released recently,
also barred banks, financial institutions and non-banking
financial companies from raising loans abroad or
providing guarantees.
Foreign loans exceeding US $ 50
mln can now be raised only for financing import
of equipment and meeting the foreign exchange requirements
of infrastructure projects.
Till now, the only restriction
on the end-use of external commercial borrowings
was on speculative investments and investments in
real estate. To ensure that the borrowings are staggered,
the finance ministry has reversed its policy and
asked companies to park unused loans abroad.
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Our Say |
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| For
small and medium scale borrowers, there
appears to be no cause for concern since
there has been virtually no change in
the norms for borrowing up to US $ 50
mln. However the new policy is clearly
indicative of the government’s
intention that India Inc should source
its larger credit requirements from
the domestic market. |
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As
per the new guidelines, the all-inclusive ceiling
on the interest spread over the six-month London
Inter-Bank Offered Rate (Libor) has been reduced
to 300 basis points from 450 basis points for projects
over eight years. For other projects, the ceiling
will be 150 basis points over Libor, instead of
the existing 300, while for infrastructure projects
the new ceiling is 250 basis points instead of 400.
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To curb the possibility of arbitrage between the
rising rupee and the falling dollar, and also to
dampen volatility in the foreign exchange market,
the ministry has made it mandatory that external
commercial borrowings for meeting rupee expenditure
under the automatic route should be hedged. The
only exception is where there is a natural hedge
in the form of uncovered foreign exchange receivables,
which will be ensured by authorised dealers. |
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| Services
paid for in foreign exchange exempt from service
tax again ! |
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Service tax exemption on all taxable
services, for which payments are received in foreign
exchange, have recently been restored by the government.
The move marks a complete rollback of the Budget
decision of withdrawing this exemption, which was
in force since April 1999.
Following the Budget announcement, the government
was levying service tax on a host of categories of
services by maintaining that the sale of these services
to overseas entities cannot be construed as exports.
The levy was in force from March 1 to November 19,
’03. However, from November 20 onwards, payments
received in foreign exchange on the sale of all such
services to overseas entities are exempt from service
tax. |
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Our Say |
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| Though
services rendered by call centres per
se are (by virtue of specific provisions)
exempt from the service tax ambit, business
auxiliary services (including those
rendered by BPO operations) previously
exempt till Feb 28th were being covered.
With this development it seems prima
facie that the definition of business
auxiliary services, in the context of
those rendered to foreign companies,
are rendered redundant. Thus virtually
all services encompassed (including
BPO/ITES/IT operations) with billings
made to the foreign client will be free
from the services tax net, which should
be a welcome relief. |
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| Simply
put, the CBEC has finally agreed to treat the sale
of these categories of services to overseas entities
as exports. The decision was apparently taken in
cognizance of the fact that the CBEC’s policy
on service exports was out of sync with the WTO
classification of trade in services based on their
mode of delivery.
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