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CA Final · Direct Tax Laws & International Taxation · Fundamentals of BEPS

Kaveri Auto Components Ltd, an Indian company, paid interest of Rs 20 crore to its non-resident associated enterprise on a loan. Its EBITDA for the year is Rs 50 crore. Assume the limitation on interest deduction applies at 30% of EBITDA, in line with the BEPS Action 4 approach as adopted in India, and no other interest is paid. What is the interest disallowed in the year, and what happens to it?

Allowed interest is capped at 30% of EBITDA, which is Rs 15 crore. The excess Rs 5 crore is disallowed in the current year but may be carried forward for up to eight assessment years, to be claimed within the cap in later years.

  1. ARs 5 crore is disallowed and may be carried forward for up to 8 assessment yearsCorrect
  2. BRs 20 crore is disallowed and cannot be carried forward
  3. CRs 5 crore is disallowed permanently, with no carry forward
  4. DRs 5 crore is disallowed and may be carried forward for up to 4 assessment years

Explanation

The allowable interest is 30% of Rs 50 crore = Rs 15 crore. The excess is Rs 20 crore - Rs 15 crore = Rs 5 crore. Under the Indian rule the excess interest can be carried forward for up to 8 assessment years, to be set against the permitted capacity of later years. Disallowing the whole Rs 20 crore wrongly ignores the cap.

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