Thin capitalization arises when a company is financed through a relatively high level of debt compared to equity. In general, companies employ a mix of owned and borrowed capital to fund operations. Owned capital, which includes share capital and reserves, does not attract any interest expense and thus does not reduce the company’s taxable income. Borrowed capital, however, carries an interest liability that is typically recorded as an expense in the profit and loss account. Unless the interest is capitalized, this expense is generally deductible under domestic tax laws, thereby reducing the taxable income of the company. When a company relies heavily on debt, the interest burden significantly impacts its profitability and taxation, which is why such financing structures attract attention under the concept of thin capitalization. Conversely, financing through shareholders’ funds results in payments in the form of dividends, which are considered appropriations of profit and not deductible from taxable income.
Motivation Behind Thin Capitalization Strategies
Entities may prefer thin capitalization primarily for two tax-related reasons. The first reason is to leverage interest deductions. Since interest on loans is usually tax-deductible, companies can reduce their taxable profits by recording interest payments as an expense. The second and more complex strategy involves profit shifting. This is typically used by multinational corporations that structure loans through associated enterprises in low or no-tax jurisdictions. These corporations benefit from charging the interest as an expense in high-tax jurisdictions while receiving the interest income in jurisdictions where it attracts little or no tax. This results in a significant reduction in the global tax outgo of the group. Consider an Indian subsidiary that borrows heavily from its parent company located in a low-tax jurisdiction. The interest payments reduce the Indian subsidiary’s taxable income in India while increasing the parent company’s income in its home country, where taxes are minimal or non-existent. This structure directly impacts the Indian tax base and raises concerns for tax authorities.
Legislative Response to Thin Capitalization
To address such aggressive tax planning techniques, countries across the world have adopted various rules that limit interest deductions. One of the key recommendations in this regard comes from the Base Erosion and Profit Shifting (BEPS) Project undertaken by the Organisation for Economic Co-operation and Development (OECD). Action Plan 4 under the BEPS initiative specifically deals with limiting base erosion involving interest deductions and other financial payments. In line with this recommendation, India introduced Section 94B into the Income-tax Act, 1961, which aims to curtail the erosion of the tax base through excessive interest payments to non-resident associated enterprises. This section was introduced by the Finance Act, 20,17, a,nd came into effect from Assessment Year 2018-19 onwards. The purpose of Section 94B is to ensure that interest expenses claimed as deductions are not disproportionately large about the taxable income and are not used as tools to shift profits out of the country.
Applicability of Section 94B
Section 94B applies to Indian companies or permanent establishments of foreign companies in India that incur interest expenses on debts issued by non-resident associated enterprises. The provision gets triggered if the total interest expenditure claimed by the Indian entity exceeds one crore rupees in a financial year. The key determinant here is the relationship between the lender and the borrower. The section targets interest payments made to non-resident associated enterprises, which are entities having direct or indirect participation in the management, control, or capital of the Indian borrower, or where both entities are under common control. If the interest is paid to an independent third-party lender, but the associated enterprise provides an explicit or implicit guarantee for the debt or deposits matching funds with the lender, such loans are also deemed to be from associated enterprises and fall under the purview of this section.
Threshold and Quantum of Disallowance
Under Section 94B, where the interest expense exceeds one crore rupees, the interest deduction is restricted to 30 percent of the earnings before interest, taxes, depreciation, and amortization (EBITDA) of the borrower. Any interest expense above this threshold is disallowed in the current year but can be carried forward for eight subsequent assessment years. The disallowed interest can be claimed as a deduction in the succeeding years to the extent of the available limit of 30 percent of EBITDA in those years. It is important to note that this section does not apply to banking or insurance companies, considering the capital structure and regulatory requirements applicable to such companies.
Associated Enterprise and Deemed Lender Relationship
The term ‘associated enterprise’ is defined under Section 92A of the Income-tax Act and includes entities with a significant level of participation in the management, capital, or control of the other enterprise. Section 94B also includes deemed arrangements under which, even though the loan is from a third party, it is treated as a loan from an associated enterprise. This happens if the associated enterprise either provides an implicit or explicit guarantee or deposits matching funds with the third-party lender. For example, if a parent company located abroad guarantees the loan taken by its Indian subsidiary from a foreign bank, the loan is treated as if iwereis from an associated enterprise. This provision ensures that companies do not bypass the rule by routing the funding through third parties while retaining control or influence over the lending arrangement.
Scope of Debt and Nature of Interest
Section 94B applies to all forms of debt, whether long-term or short-term, that involve interest payments. This includes loans, debentures, bonds, or any other financial instrument where interest is charged. The term ‘interest’ for this section also includes any payments that are like interest or similar to interest. This broad scope ensures that the provision covers not only conventional loans but also structured finance instruments that effectively function as debt and have interest components, regardless of their nomenclature. It ensures that the legislation remains effective in addressing various forms of financial arrangements that can be used to achieve thin capitalization.
Purpose and Objective of Section 94B
The primary objective of Section 94B is to prevent base erosion through interest deductions that are not in proportion to the economic activity carried out in India. By placing a cap on interest deduction, the section seeks to ensure that tax deductions reflect real economic costs and are not a result of aggressive tax planning. It aims to strike a balance between allowing reasonable interest deductions and curbing tax avoidance through excess leverage. The limitation on deductibility also encourages businesses to adopt a healthier mix of debt and equity in their capital structures. Furthermore, it aligns India’s tax framework with global best practices and strengthens the integrity of its corporate tax base.
Interaction with Transfer Pricing Provisions
Section 94B operates independently of the transfer pricing provisions contained in Sections 92 to 92F of the Income-tax Act. This means that even if the interest payment to the associated enterprise is at an arm’s length price as per transfer pricing rules, the limitation under Section 94B may still apply if the total interest expense exceeds the specified limit. The two sets of provisions serve different purposes. While transfer pricing ensures that the interest rate and terms are consistent with market standards, Section 94B deals with the quantum of deduction allowed from the company’s earnings. Therefore, compliance with one does not automatically ensure exemption from the other, and companies must evaluate their transactions under both frameworks independently.
Global Perspective and Comparative Framework
Many countries have implemented rules to address thin capitalization and interest deduction abuse. The United States has rules under Section 163(j) of the Internal Revenue Code that limit business interest deductions. The United Kingdom, Australia, and Germany have similar provisions in line with the OECD BEPS Action 4 recommendation. These rules generally limit the deductibility of interest based on a percentage of EBITDA or impose debt-to-equity ratio thresholds. India’s approach through Section 94B is consistent with these global practices and underscores the country’s commitment to international tax transparency and base protection. By implementing such rules, countries seek to ensure that profits are taxed where economic activities generating those profits are performed and where value is created.
Carve-Out for Banking and Insurance Companies
Section 94B specifically exempts banking and insurance companies from its scope. This carve-out recognizes the unique nature of these industries, where borrowing is an integral part of daily operations and their capital structures are strictly governed by regulatory frameworks. In such sectors, interest payments are not only inevitable but also essential for revenue generation. For example, banks borrow funds to lend and earn a margin, while insurance companies may engage in reinsurance transactions or other forms of capital structuring. Subjecting them to interest deduction limitations would disrupt normal operations and could create inconsistencies in the tax system. Therefore, to maintain alignment with the business realities and regulatory environment of these sectors, the legislature excluded them from the application of Section 94B.
Carry Forward and Set-Off of Disallowed Interest
If an assessee is unable to claim the full deduction of interest due to the 30 percent EBITDA cap under Section 94B, the excess interest is not permanently lost. Instead, such disallowed interest can be carried forward to subsequent assessment years for up to eight years. In each of those years, the carried-forward interest can be deducted to the extent the 30 percent of EBITDA threshold allows. This provision provides relief to taxpayers by allowing them to eventually claim the deduction over time if their financial performance improves. However, it also ensures that the deduction is linked to the entity’s economic activity and does not provide an immediate avenue for base erosion. If the business continues to incur low EBITDA or persistently high interest expenditure, some portion of the carried-forward interest may ultimately lapse, creating a deferred tax burden. Hence, companies must forecast their future EBITDA trends to determine whether the disallowed interest will be utilizable within the statutory time limit.
Interplay with Section 36(1)(iii) and Other Deductions
Interest on borrowed capital is generally allowed as a deduction under Section 36(1)(iii) of the Income-tax Act if the borrowing is for business or profession. This deduction is subject to fulfillment of certain conditions, such as the linkage between the borrowings and the business purpose, and the actual payment of interest. However, Section 94B overrides Section 36(1)(iii) to the extent it imposes a cap on the quantum of deductible interest. In other words, even if the interest expense qualifies under Section 36(1)(iii), the deduction will still be limited to 30 percent of EBITDA under Section 94B. This ensures that the broader objective of preventing profit shifting is not diluted by general deduction provisions. Additionally, it prevents taxpayers from relying on other sections to bypass the limitation, thereby reinforcing the integrity and primacy of Section 94B in such cases.
Example Illustrating the Operation of Section 94B
Consider an Indian company that incurs an EBITDA of INR 100 crore during a financial year. It has borrowed INR 500 crore from a non-resident associated enterprise and pays interest of INR 60 crore during the year. Since the total interest exceeds INR 1 crore, Section 94B becomes applicable. The maximum interest allowable as deduction under this section is 30 percent of EBITDA, i.e., 30 percent of INR 100 crore, which amounts to INR 30 crore. Therefore, only INR 30 crore will be allowed as a deduction, and the balance INR 30 crore will be disallowed in the current year. The disallowed INR 30 crore can be carried forward and claimed in the subsequent years, subject to the same 30 percent of EBITDA limitation in each year and the eight-year carry-forward period.
Distinction Between Arm’s Length and Interest Cap
A common misconception is that if a transaction passes the arm’s length test under transfer pricing regulations, no further scrutiny is required. However, Section 94B introduces a quantitative cap that operates irrespective of whether the interest is at arm’s length. For example, an interest payment of INR 60 crore at a rate that is consistent with the market rate might pass the transfer pricing scrutiny, but under Section 94B, only 30 percent of EBITDA can be claimed as a deduction. This indicates a dual-level regulation—first, qualitative control through transfer pricing rules and second, quantitative control through a hard cap on deductibility. Taxpayers must ensure that both these requirements are satisfied independently. Transfer pricing ensures that the price of the transaction is fair, while Section 94B ensures that the quantum of deduction does not erode the tax base disproportionately.
Interest Paid to Third Parties with AE Guarantees
A complex but important aspect of Section 94B is its application to loans from third-party lenders when associated enterprises provide guarantees or deposit matching funds. In such cases, although the borrowing appears to be from an unrelated party, the underlying economic control by the associated enterprise brings the transaction within the scope of Section 94B. For example, if an Indian company borrows from a foreign bank and its parent company, located abroa,,provides a corporate guarantee, the loan is deemed to be from an associated enterprise. This preventsthe structuring of debts through intermediary arrangements to avoid the interest cap. The provision ensures substance over form by focusing on the control and influence of the associated enterprise rather than the legal identity of the lender. This also aligns with the OECD’s recommendation to tackle hybrid mismatches and disguised debt arrangements.
Treatment in Case of Multiple Lenders
In scenarios where the interest expense is incurred on loans from multiple lenders, including both associated enterprises and third parties, the application of Section 94B becomes nuanced. The section applies only to interest paid or payable to non-resident associated enterprises or deemed associated enterprises. Therefore, interest on borrowings from independent third parties without any AE involvement is not subject to the 30 percent EBITDA limitation. If a company incurs a total interest of INR 80 crore, of which INR 50 crore is paid to AEs and INR 30 crore to third parties, the restriction under Section 94B will apply only to the INR 50 crore. The deduction for the INR 30 crore paid to unrelated parties is allowed without limitation, subject to general deductibility under Section 36(1)(iii). In such cases, care must be taken to segregate interest expense appropriately and maintain proper documentation to support the lender classification.
Challenges in Implementation and Compliance
While the objective of Section 94B is clear, its implementation poses several challenges for businesses. One of the primary difficulties is identifying whether a loan from a third party falls within the deemed associated enterprise category due to guarantees or funding arrangements. This requires a detailed understanding of financial contracts and the commercial relationships between the parties. Another challenge lies in calculating EBITDA consistently, especially in companies that follow different accounting policies or have significant non-operating incomes and expenses. There may also be instances of overlap or conflict with other provisions,, such as thin capitalization rules in tax treaties or provisions related to deemed income. Furthermore, maintaining separate ledgers for AE and non-AE interest and tracking the utilization of carried-forward interest deductions addss to the compliance burden. Businesses must invest in robust tax governance systems and seek expert guidance to navigate these complexities effectively.
Judicial Precedents and Departmental Guidance
As of now, Section 94B is relatively new, and limited judicial precedents are available to provide interpretative clarity. However, over time, it is expected that litigation will arise around the scope of deemed AE loans, calculation of EBITDA, and the interplay with other provisions. In the meantime, businesses may refer to international practices and OECD commentary for guidance. The Central Board of Direct Taxes (CBDT) may also issue clarifications or circulars to assist in uniform interpretation. Until then, conservative and well-documented tax positions are advisable to mitigate the risk of disallowance and penalties.
Planning Opportunities and Strategic Considerations
Despite the restrictive nature of Section 94B, companies can adopt strategic measures to manage their interest expense more efficiently. One approach is to rebalance the capital structure by increasing equity infusion from associated enterprises instead of relying entirely on debt. Another option is to refinance loans from associated enterprises with loans from third-party lenders to avoid triggering the limitation. Additionally, companies may restructure interest payments to ensure that the 30 percent cap is not breached or may schedule debt repayment in a manner that reduces the annual interest burden. Some companies may also explore the possibility of converting debt into equity, which eliminates interest payments and thus avoids deductibility issues. These strategies must be aligned with business realities, regulatory approvals, and transfer pricing principles to withstand scrutiny from tax authorities.
Impact on Multinational Groups Operating in India
Multinational corporations with operations in India are significantly impacted by Section 94B, especially when their Indian subsidiaries are financed through intercompany loans from overseas group entities. The restriction on interest deductibility affects group-wide tax planning and capital structuring. Typically, multinational groups structure their investments through a combination of equity and debt, with a preference for debt to maximize tax deductions through interest expense. Section 94B curtails this preference by imposing a cap on how much interest can be deducted when paid to non-resident associated enterprises. This compels multinationals to revisit their funding models for Indian entities. Many MNCs are now focusing on increasing equity capital or using hybrid instruments with limited interest obligations to reduce the impact of the restriction. Additionally, some are exploring central treasury operations or third-party borrowings to stay outside the ambit of the provision while still addressing funding needs effectively.
Impact on Inbound and Outbound Investments
Section 94B not only affects inbound investments but also has implications for Indian entities investing abroad. For Indian companies establishing subsidiaries or acquiring businesses overseas, funding through intercompany debt is a common practice. However, when the foreign subsidiary pays interest to the Indian parent or another group company, it may also face thin capitalization or similar rules in the respective foreign jurisdiction, potentially leading to a disallowance of interest and double taxation. On the inbound side, foreign investors need to reconsider how they structure funding for Indian subsidiaries to maintain deductibility and comply with the Indian interest limitation rule. Thus, the section drives alignment between international tax rules and requires multinational groups to adopt holistic cross-border tax planning strategies that consider the interplay of similar rules across jurisdictions.
Tax Treaty Considerations and Interaction with Section 94B
India has tax treaties with many countries, and these treaties govern the taxation of interest income in cross-border situations. However, tax treaties do not restrict the domestic law of a country from determining the deductibility of an expense. Section 94B operates as a limitation on the deduction of interest and does not affect the taxation of interest income in the hands of the recipient. Even if a tax treaty limits the rate of tax on interest income in India to a lower percentage, it does not impact the disallowance of the interest expenditure under Section 94B. Therefore, the taxpayer cannot invoke a treaty to override the limitation on deduction. That said, where a tax treaty provides for non-discrimination against permanent establishments or associated enterprises, taxpayers may explore whether disallowance under Section 94B constitutes such discrimination. However, these arguments are yet to be tested in Indian courts, and until then, Section 94B will apply as a domestic limitation regardless of treaty protection.
Regulatory Framework and Reporting Requirements
The enforcement of Section 94B requires taxpayers to maintain adequate documentation and provide relevant disclosures in their tax filings. Taxpayers must identify interest paid to associated enterprises and ensure proper classification in their books. The form for reporting international transactions, Form 3CEB, may also require disclosure of such interest payments under transfer pricing regulations. Further, the carried-forward interest not allowed in the current year must be tracked and disclosed in tax computations for future years. Tax authorities may seek detailed explanations, agreements, and correspondence relating to borrowings from associated enterprises, including evidence of guarantees or funding arrangements in case of third-party loans. Failure to comply with reporting requirements may result in penalties and prolonged scrutiny during assessments. Hence, companies must enhance their internal systems to ensure accurate reporting and timely compliance with all procedural aspects of Section 94B.
EBITDA Calculation and Practical Issues
One of the most crucial elements under Section 94B is the calculation of EBITDA, as it directly influences the deductible amount of interest. However, there is no specific definition of EBITDA provided in the Act. Generally, it is understood as earnings before interest, tax, depreciation, and amortization, computed as per the books of accounts prepared under Indian accounting standards. This creates interpretative issues such as whether extraordinary or exceptional items should be included or excluded, and whether the EBITDA should be calculated on a standalone or consolidated basis. Moreover, in the case of companies with multiple business segments or group structures, determining a single EBITDA figure that fairly represents the operations of the borrowing entity becomes complex. In the absence of specific guidance, most companies rely on accounting conventions and auditor opinions to arrive at the EBITDA figure. Given the potential for disputes, companies should maintain detailed working papers and reconciliations to support the calculation and justify their tax position in case of an audit or inquiry.
Financial Restructuring and Use of Hybrid Instruments
To mitigate the effect of interest deduction limitations under Section 94B, companies may explore financial restructuring options. One such option is to convert part of the debt into equity or preference shares, which do not attract interest payments and therefore do not fall within the purview of Section 94B. Another emerging approach is to use hybrid instruments such as compulsorily convertible debentures (CCDs) or optionally convertible debentures (OCDs), which are treated as equity for funding purposes but as debt for tax or accounting purposes. The treatment of these instruments varies based on their terms and the jurisdiction of the investor, and therefore must be carefully analyzed. While these instruments offer flexibility and reduce interest outgo, they must still be evaluated under the lens of substance-over-form to avoid potential litigation. Tax authorities may disregard such arrangements if they believe the primary purpose is to avoid the provisions of Section 94B.
Economic Substance and Anti-Avoidance Principles
Section 94B is inherently aligned with the broader anti-avoidance principle of ensuring that tax deductions are based on economic substance. Taxpayers attempting to circumvent this provision through artificial arrangements, such as round-tripping of funds or conduit lending, may face challenges under India’s General Anti-Avoidance Rule (GAAR). GAAR allows the tax authorities to deny tax benefits if the primary purpose of a transaction is to obtain a tax advantage. If a company structures loans in a way that technically avoids the application of Section 94B but lacks commercial justification, it risks the transaction being recharacterized under GAAR. This reinforces the importance of having a clear business purpose and economic rationale for all funding arrangements, including those involving associated enterprises. Documentation such as board resolutions, funding strategy papers, and independent valuation reports can support the commercial substance of such transactions and safeguard against potential disputes.
Comparative Tax Positions and Financial Statement Implications
Disallowance under Section 94B affects the current year’s tax expense and also leads to the creation of deferred tax assets in the financial statements. Since the disallowed interest is eligible for deduction in future years, it results in a timing difference under accounting standards, particularly Ind AS 12 on Income Taxes. Companies must recognize deferred tax assets for the disallowed portion, subject to recoverability assessments. This requires projections of future taxable profits and EBITDA to justify the utilization of carried-forward interest. From a financial reporting perspective, frequent disallowances and corresponding deferred tax assets may indicate an aggressive funding structure, which could raise concerns among auditors, investors, and analysts. Therefore, CFOs and finance teams must carefully manage tax provisioning, financial disclosures, and stakeholder communication related to Section 94B implications.
Interaction with Other Interest-Related Provisions
Besides Section 94B, the Income-tax Act contains several other provisions related to the allowability and disallowance of interest expenses. Section 14A disallows expenditure incurred concerning exempt income, including interest costs. Section 43B mandates that interest payable to banks and financial institutions is allowed as a deduction only if paid before the due date of filing the return. Section 94B operates independently of these provisions and must be applied in addition to any other applicable section. This layered application of provisions necessitates a holistic approach to interest disallowance. For example, a company may have to disallow interest under Section 14A, defer deduction under Section 43B, and further restrict deduction under Section 94B. Coordinating all these computations and ensuring that there is no double disallowance or misclassification requires careful tax planning and documentation.
Tax Audit and Assessment Considerations
Under Indian tax laws, companies are subject to tax audits if their turnover or gross receipts exceed prescribed thresholds. In such audits, disclosures relating to interest payments, related party transactions, and applicability of Section 94B become critical. Tax auditors are expected to verify the classification of lenders, the computation of EBITDA, the segregation of associated enterprise interest from unrelated party interest, and the calculation of disallowed and carried-forward interest. Inaccuracies or misrepresentations can lead to tax adjustments, penalties, and interest liabilities during assessments. Furthermore, during scrutiny assessments, tax officers may demand documentation including loan agreements, board approvals, transfer pricing reports, financial statements, and other supporting materials. Companies must be prepared with a comprehensive audit file addressing all aspects of Section 94B to avoid prolonged litigation or adverse assessments. Proper documentation, supported by contemporaneous evidence, is the best defense during audit proceedings.
Documentation and Governance Requirements
Effective compliance with Section 94B requires strong internal governance and robust documentation practices. This includes maintaining clear loan documentation, evidencing the source and terms of funding, substantiating the role of associated enterprises in funding arrangements, and preparing detailed EBITDA computations. Where guarantees or other financial supports are involved from associated enterprises, copies of guarantee deeds, comfort letters, and intercompany correspondence should be preserved. Transfer pricing documentation must also include detailed explanations of the interest transactions and their alignment with the arm’s length principle. In addition, businesses should track disallowed interest and maintain a schedule for each carry-forward year, indicating availability for set-off. Companies may also consider having internal policies on funding from group entities, including thresholds, approval procedures, and compliance checklists to ensure consistency and avoid inadvertent non-compliance. Establishing a tax risk management framework that includes Section 94B is increasingly becoming a best practice for larger groups.
Sector-Specific Implications
The impact of Section 94B varies across sectors. Capital-intensive industries such as infrastructure, energy, manufacturing, and telecommunications often rely heavily on debt funding and are more likely to be affected. In such sectors, the EBITDA levels may fluctuate significantly depending on the stage of project execution, causing variability in the allowable interest deduction. For example, during early years when revenue generation is low but debt servicing begins, large disallowances may occur. Conversely, asset-light industries such as IT services or consulting may not face significant implications, as their debt-to-equity ratios are generally modest. Real estate and construction companies may face unique challenges due to project-based accounting, longer gestation periods, and the use of multiple special-purpose vehicles (SPVs). These industries must tailor their funding structures and tax strategies to account for the limitations imposed by Section 94B while also managing business-specific operational and financial constraints.
Related Case Studies and Examples
Several illustrative examples demonstrate how Section 94B applies in practice. Consider a renewable energy company that raises project finance from a foreign associated enterprise at commercial interest rates. During the first three years, the project is under construction, and EBITDA is low. Despite the interest rate being arm’s length, the company faces disallowance due to the 30 percent cap and accumulates carried-forward interest. If the company eventually generates sufficient EBITDA from operations, it may recover the disallowed amount in later years. Another case involves a real estate SPV that takes a third-party loan guaranteed by the parent company. The guarantee triggers the deemed AE clause, and interest becomes subject to Section 94B despite no direct intercompany borrowing. A pharmaceutical company restructures its debt-equity mix by converting part of the intercompany loan into optionally convertible preference shares to manage interest deductibility. These case studies reveal the importance of forecasting EBITDA, understanding funding structures, and planning for the long-term tax impact.
Future Outlook and Legislative Developments
While Section 94B is in line with international tax standards, its long-term application may evolve based on policy developments, economic factors, and global tax reforms. The OECD’s Pillar Two initiative, which introduces a global minimum tax, may alter the significance of interest deduction limitations, particularly if tax arbitrage through low-tax jurisdictions becomes less attractive. Domestically, the Indian government may issue further clarifications or amendments to refine the scope, computation method, or compliance framework of Section 94B. Taxpayers must monitor developments in this area and remain agile in adapting their funding and tax strategies. The evolution of jurisprudence will also shape the application of Section 94B. As more cases reach appellate forums, clarity will emerge on contentious issues such as deemed AE relationships, treatment of hybrid instruments, and the interplay with other provisions. For now, companies should take a conservative approach and ensure full compliance with both the letter and spirit of the law.
Key Takeaways for Taxpayers
Section 94B is a critical anti-abuse measure designed to prevent erosion of the Indian tax base through excessive interest deductions to non-resident associated enterprises. It introduces a quantitative limit on deductibility linked to EBITDA, and applies even if the interest payment is at an arm’s length price. Companies with cross-border funding arrangements must identify AE relationships, review loan structures, compute EBITDA accurately, and ensure proper documentation. Banking and insurance companies are exempt, and disallowed interest can be carried forward for eight years. The section has wide implications for tax planning, financial reporting, and transfer pricing compliance. With evolving interpretations and increasing scrutiny by tax authorities, companies must adopt a proactive compliance posture, strengthen governance frameworks, and seek professional advice when structuring intercompany financing arrangements. The importance of aligning commercial substance with tax outcomes cannot be overstated.
Conclusion
Section 94B marks a significant shift in India’s approach to curbing base erosion and aligning with global tax standards. It reflects India’s commitment to implementing OECD BEPS recommendations and addressing the risks associated with excessive interest deductions. While the provision adds complexity to tax compliance and financial structuring, it also promotes transparency and responsible fiscal behavior. Businesses must view Section 94B not just as a limitation but as a call to reassess capital strategies, enhance compliance systems, and align funding practices with global best practices. By doing so, they can achieve tax efficiency without compromising on legality or governance.