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February 3, 2021

Tax incentives for units located in International Financial Services Centre (IFSC)

by CA Shivam Jaiswal in Compliance Law, Income Tax

Tax incentives for units located in International Financial Services Centre (IFSC)

Government has establishment a world class financial services centre. Units located in IFSC enjoy some concession. In order to make location in IFSC more attractive, it is proposed to provide the following additional incentives:

(i) It is proposed to amend section 9A of the Act to provide that the Central
Government may, by notification in the Official Gazette, specify that any one or more of the conditions specified in clauses(a) to (m) of sub-section(3) or clauses (a) to (d) of sub-section (4) of section 9A of the Act shall not apply (or apply with modification) to an eligible investment fund or its eligible fund manager, if the fund manager is located in an International Financial Services Centre and has commenced operations on or before the 31st day of March, 2024.

(ii) It is also proposed to amend clause (4D) of section 10 of the Act so as to
provide that the exemption under this clause shall also be available in case of any income accrued or arisen to, or received to the investment division of offshore banking unit to the extent attributable to it and computed in the
prescribed manner.

(iii) It is also proposed to amend the expression ―specified fund‖ to include
under the purview the investment division of offshore banking unit which has been granted a category III AIF registration and fulfils other conditions to be prescribed including the condition of maintaining separate books for its investment division. The investment division of offshore banking unit is
proposed to be defined as an investment division of a banking unit of a nonresident located in an International Financial Services Centre and which has commenced operation on or before the 31st day of March, 2024.

(iv) It is also proposed to insert new clause (4E) in of section 10 of the Act so as to exempt any income accrued or arisen to, or received by a non-resident as a result of transfer of non-deliverable forward contracts entered into with an offshore banking unit of International Financial Services Centre which commenced operations on or before the 31st day of Mach, 2024 and fulfils prescribed conditions.

(v) It is also proposed to insert new clause (4F) in of section 10 of the Act so as to exempt any income of a non-resident by way of royalty on account of lease of an aircraft in a previous year paid by a unit of an International Financial Services Centre, if the unit is eligible for deduction under section 80LA for that previous year and has commenced operation on or before the 31st day of the March, 2024.

(vi) It is also proposed to insert new clause (23FF) in of section 10 of the Act so as to exempt any income of the nature of capital gains, arising or received by a non-resident, which is on account of transfer of share of a company resident in India by the resultant fund and such shares were transferred from the original fund to the resultant fund in relocation, if capital gains on such shares were not chargeable to tax had that relocation not taken place.

“Original Fund” is proposed to be defined as a fund established or incorporated or registered outside India, which collects funds from its members for investing it for their benefit and fulfils the following conditions, namely:—

  • (a) the fund is not a person resident in India;
  • (b) the fund is a resident of a country or a specified territory with which an agreement referred to in sub-section (1) of section 90 or sub-section (1) of section 90A has been entered into; or is established or incorporated or registered in a country or a specified territory notified by the Central
    Government in this behalf
  • (c) the fund and its activities are subject to applicable investor protection
    regulations in the country or specified territory where it is established or
    incorporated or is a resident; and
  • (d) fulfils such other conditions as prescribed;

“Relocation” is proposed to be defined as transfer of assets of the original
fund to a resultant fund on or before the 31st day of March, 2023, where
consideration for such transfer is discharged in the form of share or unit or
interest in the resulting fund to the shareholder or unit holder or interest holder of the original fund in the same proportion in which the share or unit or interest was held by such shareholder or unit holder or interest holder in such original fund.

“Resultant fund” is proposed to be defined as a fund established or
incorporated in India in the form of a trust or a company or a limited liability partnership, which-

  • (a) has been granted a certificate of registration as a Category I or
    Category II or Category III Alternative Investment Fund, and is regulated
    under the Securities and Exchange Board of India (Alternative Investment
    Fund) Regulations, 2012, made under the Securities and exchange Board
    of India Act, 1992 (15 of 1992); and
  • (b) is located in any International Financial Services Centre as referred to
    in sub-section (1A) of section 80LA.

(vii) It is also proposed to amend section 47 of the Act to insert new clauses in the said section so as to provide that any transfer, in relocation, of a capital asset by the original fund to the resultant fund shall not be considered as transfer for capital gain tax purpose. It is also proposed to provide another clause to provide that any transfer by a shareholder or unit holder or interest holder, in a relocation, of a capital asset being a share or unit or interest held by him in the original fund in consideration for the share or unit or interest in the resultant fund shall not be treated as transfer for the purpose of capital gains. The definition of “Original Fund”, “Relocation” and Resultant Fund shall be as already described above.

(vii) Consequential amendments shall be proposed in section 49, 56 and 79 of the Act on account of such relocation.

(ix) It is also proposed to amend the section 80LA of the Act to:

provide that deduction under said section is also available to a unit of
International Financial Services Centre if it is registered under the
International Financial Services Centre Authority Act, 2019 and thereby
removing the earlier requirement of obtaining permission under any other
relevant law.

  • provide that the income arising from transfer of an asset, being an aircraft or aircraft engine which was leased by a unit referred to in clause (c) of sub-section (2) of said section to a domestic company engaged in the business of operation of aircraft before such transfer shall also be eligible for 100% deduction subject to condition that the unit has commenced operation on or before the 31st March 2024.
  • to provide that in case the unit is registered under the International Financial Services Centre Authority Act, 2019 then the copy of permission shall mean a copy of the registration obtained under the International Financial Services Centre Authority Act, 2019.

(x) It is proposed to amend section 115AD to make the provision of this section applicable to investment division of an offshore banking unit in the same manner as it applies to specified fund. However, the provisions of this section shall apply to the extent of income that is attributable to the investment division of such banking unit as a Category-III portfolio investor under the Securities and exchange Board of India (Foreign Portfolio investors) Regulations, 2019 made under the Securities And Exchange Board of India Act, 1992 (15 of 1992), calculated in the prescribed manner.

The expression investment division of offshore banking unit‖ is also proposed to have the meaning as defined in Para (iii).

These amendments will take effect from 1st April, 2022 and will accordingly apply to the assessment year 2022-23 and subsequent assessment years.

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