Ambiguity with thin cap norms: Private credit players risk significant tax leakage

An accurate reading of thin capitalization norms is highly relevant to maximize IRRs, especially in asset heavy sectors.

Currently, the norms are interpreted such that sometimes the entire interest paid to foreign related parties is disallowed for the target (as expense). This interpretation seems contrary to legislative intent and to the explanation issu­ed by tax department.

The counter-view is to only disallow a portion of interest paid to foreign related parties (in excess of a prescribed limit). The counter is logical, has strong legal foundation and is in line with the spirit of law.