Journal Press India^®

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This paper focuses on the Indian thin capitalisation rules, its aim, design and possible impact on curbing debt bias and possible alternative to the thin capitalisation rules. Many empirical studies have shown that MNEs indulge in the practice of international debt shifting to save tax payments by utilizing differences in national tax rates and preferential tax rules. Therefore, to curb this debt financing most countries like India have implemented thin capitalisation rules that limit the amount of interest deductions in situations of debt financing. Although not much has been said on the economic effects of thin capitalisation, and the rules to combat them specifically, there is a relatively well established literature on the economic effects of anti-international tax planning policies. This paper summarizes the possible effects and impacts of thin capitalisation one could expect along with the possible reason for adopting earnings stripping rule against the safe harbour rule and the lacunas of Indian thin capitalisation rules. From theoretical point of view, the thin capitalisation rules could prove effective in curbing the debt bias and increasing the tax revenue of the Government. It is yet to be seen whether the introduction of the thin capitalisation rules will have any adverse effect on the economy and the economic structure.

Keywords

Thin capitalisation; Tax avoidance; Earning stripping rules; Tax reforms.

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