The Finance Ministry is in favour of taxing the interest earned on external commercial borrowings (ECBs). This will make ECBs costlier and could help moderate the capital account surplus.
Companies have to deposit ECBs abroad until they are in a position to use them for the earmarked projects. The Finance Ministry now plans to tax the interest earned on these funds. Says D.K. Joshi, Principal Economist, CRISIL: “Since ECBs make up a large chunk of foreign capital inflows, tackling them has been on agendas of the government and the RBI for some time. So, a tax that will increase the cost of ECBs will not surprise me.” The borrowers already face restrictions on their ECBs, such as yearly restrictions on the amount of borrowings.