Finance Bill 2023 proposes to extend the period of tax benefits/incentives for funds relocating to ‘IFSC’ from March 31, 2023 to March 31, 2025, as well as to provide relief from double taxation on income distributions to non-resident ODI holders.
As a result, clauses 5, 21, and 59 of the Finance Bill 2023 proposed changes to Sections 10(4E) and 47 of the Income Tax Act, 1961.
1. Several tax breaks have been granted to units located in the International Financial Services Centre (IFSC) under the Income Tax Act in recent years in order to make it a global financial services hub.
2. It is proposed to provide the following incentives to further encourage IFSC operations:
i) It is proposed to amend clause (b) of the Explanation to clause (viiad) of section 47 of the Income Tax Act to move the deadline for transferring assets from the original fund, or its wholly owned special purpose vehicle, to a resultant fund in the event of relocation to March 31, 2025, from the current deadline of March 31, 2023.
ii) Non-residents’ income from the transfer of Offshore Derivative Instruments (ODI) entered into with an IFSC Banking unit is exempt under section 10(4E) of the Income Tax Act. The IFSC Banking Unit (IBU) invests in permissible Indian securities under the ODI contract. Under section 115AD of the Income Tax Act, income earned by the IBU on such investments is taxed as capital gains, interest, and dividends. Following taxation, the IBU distributes such income to ODI holders. Currently, the exemption applies only to the transfer of ODIs and not to the distribution of income to non-resident ODI holders; as a result, this distributed income is taxed twice in India: once when received by the IBU and again when distributed to non-resident ODI holders.
To avoid double taxation, it is proposed to amend section 10(4E) of the Income Tax Act to exempt any income distributed on offshore derivative instruments entered into with an offshore banking unit of an International Financial Services Centre, as defined in section 80LA(1A), that meets the prescribed conditions. It has also been specified that such exempted income shall only include amounts charged to tax in the hands of the IFSC Banking Unit under section 115AD.
(iii) The IFSCA (Fund Management) Regulations, 2022, went into effect on May 19, 2022. To include the reference to the said regulation in the Income Tax Act’s provisions, it is proposed to amend the definitions of “Specified Fund,” “Resultant Fund,” and “Investment Fund” include the reference to the IFSCA (Fund Management) Regulations, 2022.
3. The amendments referred to in paragraphs 2(i) and 2(iii) will take effect on April 1, 2023, and will apply to assessment years 2023-24 and onwards. The amendment in paragraph 2(ii) will take effect on April 1, 2024, and will apply to assessment years 2024-25 and onwards.