Section 94B: Thin capitalization rules may impede operations of NBFCs, by Nidhi Bothra & Kanishka Jain, 24th May, 2017
Genesis of the thin capitalization rules
The genesis of the thin capitalization rules lies in the distinction between tax treatment of debt and equity. A company typically finances its projects either through equity and debt or mixture of both, equity being costly in terms of cost and ownership is less attractive than the debt financing where interest is a deductible expense. Debt is not only less expensive to service, it also reduces tax liabilities and enhances return on equity.