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Indian law includes provisions
taxing fringe benefits (“perquisites”), but does not have an express provision
relating to below-market interest loans.
In the case noted, the Indian
tax authorities identified a loan from an employer to an employee on audit, and
contended that the employer should have withheld income tax on the value of the
foregone interest. However, the auditor arbitrarily applied an interest rate of
15%, contending that such a rate would be reasonable under the circumstances.
The company appealed within the
Indian system, and eventually the case made its way to the Appellate Tribunal.
The Tribunal upheld the
argument that the benefit of an interest-free loan is a taxable perquisite. However,
it overturned the use of the 15% rate to determine the value. According to the
tribunal, such an ad hoc determination is not correct. It instead applied the
lower rate that is announced each 1 April by the State Bank of India for
Related: India Seeks Advice on Scope of New Law Taxing Digital Businesses
Interest free bridge loans are
common in the relocation industry, and escape tax in the United States due to a
regulatory exception to the below-market interest rules of the U.S. tax code.
Such loans in India, however, have now been held to result in tax to the
employee, and will require withholding. Any companies making such loans in
India must begin to treat the benefit of the below-market interest as taxable
Worldwide ERC® continues to monitor the impact of the Tax Cuts and Jobs Act on talent mobility programs and policies.
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