In order to promote the development of world class financial infrastructure in India, some tax concessions have already been provided in respect of business carried on from an International Financial Services Centre (IFSC). To further promote such development and bring these IFSC at par with similar IFSC in other countries, following additional benefits are proposed:
A) Under the existing provisions of the section 47 of the Act, any transfer of a capital asset, being bonds or Global Depository Receipts or rupee denominated bond of an Indian company or derivative, made by a non-resident through a recognised stock exchange located in any IFSC and where the consideration for such transaction is paid or payable in foreign currency shall not be regarded as transfer.
With a view to provide tax-neutral transfer of certain securities by Category III Alternative Investment Fund (AIF) in IFSC, it is proposed to amend the said section so as to provide that any transfer of a capital asset, specified in the said clause by such AIF, of which all the unit holders are non-resident, are not regarded as transfer subject to fulfillment of specified conditions.
It is also proposed to widen the types of securities listed in said clause by empowering the Central Government to notify other securities for the purposes of this clause.
These amendments will take effect from 1st April, 2020 and will, accordingly, apply in relation to the assessment year 2020-21 and subsequent assessment years.
[Clause 17]
B) With a view to facilitate external borrowing by the units located in IFSC, it is proposed to amend the section 10 of the Act so as to provide that any income by way of interest payable to a non-resident by a unit located in IFSC in respect of monies borrowed by it on or after 1st day of September, 2019, shall be exempt.
This amendment will take effect from 1st April, 2020 and will, accordingly, apply in relation to the assessment year 2020-21 and subsequent assessment years.
[Clause 6]
C) The existing provisions of the section 115-O of the Act, provide that no tax on distributed profits shall be chargeable in respect of the total income of a company, being a unit of an IFSC, deriving income solely in convertible foreign exchange, for any assessment year on any amount declared, distributed or paid by such company, by way of dividends (whether interim or otherwise) on or after the 1st day of April, 2017, out of its current income, either in the hands of the company or the person receiving such dividend.
To facilitate distribution of dividend by companies operating in IFSC, it is proposed to amend the provision of the said section to provide that any dividend paid out of accumulated income derived from operations in IFSC, after 1st April 2017 shall also not be liable for tax on distributed profits.
This amendment will take effect from 1st September, 2019.
[Clause 35]
D) The existing provisions of the section 115R of the Act, provide that any amount of income distributed by the specified company or a Mutual Fund to its unit holders shall be chargeable to tax and such specified company or Mutual Fund shall be liable to pay additional income-tax on such distributed income.
In order to incentivize relocation of Mutual Fund in IFSC, it is proposed to amend the said section so as to provide that no additional income-tax shall be chargeable in respect of any amount of income distributed, on or after the 1st day of September, 2019, by a Mutual Fund of which all the unit holders are non-residents and which fulfills certain other specified conditions.
This amendment will take effect, from 1st September, 2019.
[Clause 37]
E) The existing provisions of the section 80LA of the Act, inter alia, provide profit linked deduction of an amount equal to one hundred per cent of income for the first five consecutive assessment years and fifty per cent of income for the next five consecutive assessment years, to units of an IFSC.
With a view to further incentivize operation of units in IFSC, it is proposed to amend the said section so as to provide that the deduction shall be increased to one hundred per cent for any ten consecutive years. The assessee, at his option, may claim the said deduction for any ten consecutive assessment years out of fifteen years beginning with the year in which the necessary permission was obtained.
This amendment will take effect, from 1st April, 2020 and will, accordingly, apply in relation to the assessment year
2020-21 and subsequent assessment years.
[Clause 28]
F) Section 115A of the Act provides the method of calculation of income-tax payable by a non-resident (not being a company) or by a foreign company where the total income includes any income by way of dividend (other than referred in section 115-O), interest, royalty and fees for technical services; etc. Section 80LA, provides for deduction in respect of certain incomes to a unit located in an IFSC. However, sub-section (4) of section 115A prohibits any deduction under chapter VIA which includes section 80LA.
In order to ensure that units located in IFSC claim full deduction, it is proposed to amend section 115A of the Act so as to provide that the conditions contained in sub-section (4) of section 115A shall not apply to a unit of an IFSC for under section 80LA is allowed.
This amendment will take effect from the 1st April, 2020 and will, accordingly, apply in relation to the assessment year 2020-21 and subsequent years.
[Clause 33]
Extract of Clause 17, 6, 35, 37, 28 & 33 of Finance Bill 2019
17. Amendment of section 47.
In section 47 of the Income-tax Act, in clause (viiab), with effect from the 1st day of April, 2020,––
(A) for sub-clause (c), the following sub-clauses shall be substituted, namely:––
“(c) derivative; or
(d) such other securities as may be notified by the Central Government in this behalf,”;
(B) in the long line, after the words “made by a non-resident”, the words “or a specified fund” shall be inserted;
(C) in the Explanation, after clause (c), the following clauses shall be inserted, namely:—
(d) “securities” shall have the meaning assigned to it in clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956;
(e) “specified fund” means a fund established or incorporated in India in the form of a trust or a company or a limited liability partnership or a body corporate,—
(i) which has been granted a certificate of registration as a 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;
(ii) which is located in any International Financial Services Centre;
(iii) which is deriving income solely in convertible foreign exchange;
(iv) of which all the units are held by non-residents;
(f) “trust” means a trust established under the Indian Trusts Act, 1882 or under any other law for the time being in force;
(g) “unit” means beneficial interest of an investor in the fund and shall include shares or partnership interests;
(h) “convertible foreign exchange” means foreign exchange which is for the time being treated by the Reserve Bank of India as convertible foreign exchange for the purposes of the Foreign Exchange Management Act, 1999 and the rules made there under;’.
6. Amendment of section 10.
In section 10 of the Income-tax Act,––
(I) after clause (4B), the following clause shall be inserted, namely:––
“(4C) any income by way of interest payable to a non-resident, not being a company, or to a foreign company, by any Indian company or business trust in respect of monies borrowed from a source outside India by way of issue of rupee denominated bond, as referred to in clause (ia) of sub-section (2) of section 194LC, during the period beginning from the 17th day of September, 2018 and ending on the 31st day of March, 2019;”;
(II) with effect from the 1st day of April, 2020,––
(a) in clause (12A), for the words “forty per cent.”, the words “sixty per cent.” shall be substituted;
(b) in clause (15), after sub-clause (viii), the following sub-clause shall be inserted, namely:—
‘(ix) any income by way of interest payable to a non-resident by a unit located in an International Financial Services Centre in respect of monies borrowed by it on or after the 1st day of September, 2019.
Explanation.—For the purposes of this sub-clause,—
(a) “International Financial Services Centre” shall have the meaning assigned to it in clause (q) of section 2 of the Special Economic Zones Act, 2005;
(b) “unit” shall have the meaning assigned to it in clause (zc) of section 2 of the Special Economic Zones Act, 2005;’;
(III) in clause (34A), the brackets and words “(not being listed on a recognised stock exchange)” shall be omitted with effect from the 5th day of July, 2019.
35. Amendment of section 115-O.
In section 115-O of the Income-tax Act, in sub-section (8), for the words “out of its current income”, the words “out of its current income or income accumulated as a unit of International Financial Services 25 Centre after the 1st day of April, 2017” shall be substituted with effect from the 1st day of September, 2019.
37. Amendment of section 115R.
In section 115R of the Income-tax Act, in sub-section (2), with effect from the 1st day of 30 September, 2019,—
(A) after the second proviso, before the Explanation, the following proviso shall be inserted, namely:—
“Provided also that no additional income-tax shall be chargeable in respect of any amount of income distributed on or after the 1st day of September, 2019 by a specified Mutual Fund, out of its income derived from transactions made on a recognised stock exchange located in any International Financial Services Centre:”;
(B) in the Explanation,—
(a) after clause (i), the following clause shall be inserted, namely:––
‘(ia) “convertible foreign exchange” means foreign exchange which is for the time being treated by the Reserve Bank of India as convertible foreign exchange for the purposes of the Foreign Exchange Management Act, 1999 and the rules made thereunder;’;
(b) after clause (ii), the following clauses shall be inserted, namely:––
‘(iii) “International Financial Services Centre” shall have the meaning assigned to it in clause (q) of section 2 of the Special Economic Zones Act, 2005;
(iv) “recognised stock exchange” shall have the meaning assigned to it in clause (ii) of Explanation 1 to clause (5) of section 43;
(v) “specified Mutual Fund” means a Mutual Fund specified under clause (23D) of section 10—
(a) located in any International Financial Services Centre;
(b) deriving income solely in convertible foreign exchange;
(c) of which all the units are held by non-residents;
(vi) “unit” means beneficial interest of an investor in the fund;’.
28. Amendment of section 80LA.
In section 80LA of the Income-tax Act, with effect from the 1st day of April, 2020,––
(i) for sub-section (1), the following sub-sections shall be substituted, namely:––
“(1) Where the gross total income of an assessee, being a scheduled bank, or, any bank incorporated by or under the laws of a country outside India; and having an Offshore Banking Unit in a Special Economic Zone, includes any income referred to in sub-section (2), there shall be allowed, in accordance with and subject to the provisions of this section, a deduction from such income, of an amount equal to––
(a) one hundred per cent. of such income for five consecutive assessment years beginning with the assessment year relevant to the previous year in which the permission, under clause (a) of sub-section (1) of section 23 of the Banking Regulation Act, 1949 or permission or registration under the Securities and Exchange Board of India Act,1992 or any other relevant law was obtained, and thereafter;
(b) fifty per cent. of such income for five consecutive assessment years.
(1A) Where the gross total income of an assessee, being a Unit of an International Financial Services Centre, includes any income referred to in sub-section (2), there shall be allowed, in accordance with and subject to the provisions of this section, a deduction from such income, of an amount equal to one hundred per cent. of such income for any ten consecutive assessment years, at the option of the assesse, out of fifteen years, beginning with the assessment year relevant to the previous year in which the permission, under clause (a) of sub-section (1) of section 23 of the Banking Regulation Act, 1949 or permission or registration under the Securities and Exchange Board of India Act,1992 or any other relevant law was obtained.”;
(ii) in sub-section (2), in the opening portion, for the word, brackets and figure “sub-section (1), the words, brackets, figures and letter “sub-section (1) and sub-section (1A)” shall be substituted.
33. Amendment of section 115A.
In section 115A of the Income-tax Act, in sub-section (4), after clause (b), the following proviso shall be inserted with effect from the 1st day of April, 2020, namely:––
“Provided that nothing contained in this sub-section shall apply to a deduction allowed to a Unit of an International Financial Services Centre under section 80LA.”.
Note on Clause 17, 6, 35, 37, 28 & 33 of Finance Bill 2019
Clause 17 of the Bill seeks to amend section 47 of the Income-tax Act relating to transactions not regarded as transfer.
The provisions of the said section provide that any transfer of a capital asset, being bonds or Global Depository Receipts referred to in sub-section (1) of section 115AC or rupee denominated bond of an Indian company or derivative, made by a non-resident through a recognised stock exchange located in any International Financial Services Centre and where the consideration for such transaction is paid or payable in foreign currency, shall not be regarded as transfer.
It is proposed to amend the said section so as to provide that any transfer of a capital asset, being bonds or Global Depository Receipts referred to in sub-section (1) of section 115AC or rupee denominated bond of an Indian company or derivative, made by a specified fund through a recognised stock exchange located in any International Financial Services Centre and where the consideration for such transaction is paid or payable in foreign currency, shall not be regarded as transfer.
It is also proposed to provide that transfer, at a recognised stock exchange located in any International Financial Services Centre, of such other securities as may be notified by the Central Government in this behalf, shall not be regarded as transfer in the hands of a non-resident or a specified fund.
It is also proposed to insert the definitions of the expressions “securities”, “specified fund”, “trust”, “unit” and “convertible foreign exchange” in the Explanation to clause (viiab) of section 47.
These amendments will take effect from 1st April, 2020 and will, accordingly, apply in relation to the assessment year 2020-2021 and subsequent assessment years.
Clause 6 of the Bill seeks to amend section 10 of the Income-tax Act relating to incomes not included in total income.
It is proposed to insert a new clause (4C) in the said section so as to provide for exemption in respect of any income by way of interest payable to a non-resident, not being a company, or to a foreign company, by any Indian company or business trust in respect of monies borrowed from a source outside India by way of issue of rupee denominated bond as referred to in clause (ia) of sub-section (2) of section 194LC issued during the period commencing from the 17th September, 2018 and ending on 31st March, 2019.
This amendment will take effect retrospectively from 1st April, 2019 and will, accordingly, apply in relation to the assessment year 2019-2020 and subsequent assessment years.
Further, clause (12A) of the said section provides that any payment from the National Pension System Trust to an employee on closure of his account or on his opting out of the pension scheme referred to in section 80CCD, to the extent it does not exceed forty per cent. of the total amount payable to him at the time of such closure or his opting out of the scheme, shall be exempt from tax.
It is proposed to amend the said section so as to increase the said tax exempt amount from forty per cent. to sixty per cent.
It is proposed to insert sub-clause (ix) in the clause (15) so as to provide that any income by way of interest payable to a non-resident by a unit located in an International Financial Services Centre in respect of monies borrowed by it on or after 1st September, 2019 shall be exempted from tax.
It is further proposed to insert an Explanation to define the expressions “International Financial Services Centre” and “unit”.
These amendments will take effect from 1st April, 2020 and will, accordingly, apply in relation to the assessment year 2020-2021 and subsequent assessment years.
Clause (34A) of the said section provides for exemption to any income arising to a shareholder on account of buy-back of shares not being listed on a recognised stock exchange by the company as referred to in section 115QA.
It is proposed to amend the said clause so as to provide the said exemption also to the income arising to a shareholder on account of buy-back of shares listed on a recognised stock exchange by the company as referred to in section 115QA.
This amendment will take effect from 5th July, 2019.
Clause 35 of the Bill seeks to amend section 115-O of the Income-tax Act relating to tax on distributed profits of domestic companies.
Sub-section (8) of the said section provides that notwithstanding anything contained in this section, no tax on distributed profits shall be chargeable in respect of the total income of a company, being a unit of an International Financial Services Centre, deriving income solely in convertible foreign exchange, for any assessment year on any amount declared, distributed or paid by such company, by way of dividends (whether interim or otherwise), on or after the 1st day of April, 2017, out of its current income, either in the hands of the company or the person receiving such dividend.
It is proposed to amend the said sub-section so as to include the income accumulated after the 1st day of April, 2017 within the purview of the said sub-section.
This amendment will take effect from 1st September, 2019.
Clause 37 of the Bill seeks to amend section 115R of the Income-tax Act relating to tax on distributed income to unit holders.
Sub-section (2) of the said section, inter alia, provides that any amount of income distributed by the specified company or a Mutual Fund to its unit holders shall be chargeable to tax and such specified company or Mutual Fund shall be liable to pay additional income-tax on such distributed income.
It is proposed to amend the said sub-section by inserting a proviso so as to provide that no additional income-tax shall be chargeable in respect of any amount of income distributed, on or after the 1st day of September, 2019, by a specified Mutual Fund out of its income derived from transactions made on a recognised stock exchange located in any International Financial Services Centre.
It is further proposed to insert the definition of the expressions “specified Mutual Fund”, “unit”, “convertible foreign exchange” and “International Financial Services Centre” in the Explanation to the said sub-section.
These amendments will take effect from 1st September, 2019.
Clause 28 of the Bill seeks to amend section 80LA of the Income-tax Act relating to deductions in respect of certain incomes of Offshore Banking Units and International Financial Services Centre.
The said section, inter alia, provides that where the gross total income of an assessee, (i) being a scheduled bank, or, any bank incorporated by or under the laws of a country outside India; and having an Offshore Banking Unit in a Special Economic Zone; or
(ii) being a Unit of an International Financial Services Centre, includes any income referred to in sub-section (2), there shall be allowed, in accordance with and subject to the provisions of this section, a deduction from such income, of an amount equal to (a) one hundred per cent. of such income for five consecutive assessment years beginning with the assessment year relevant to the previous year in which the permission, under clause (a) of sub-section (1) of section 23 of the Banking Regulation Act, 1949 or permission or registration under the Securities and Exchange Board of India Act, 1992 or any other relevant law was obtained, and thereafter; (b) fifty per cent. of such income for five consecutive assessment years.
It is proposed to amend the said section by substituting sub-section (1) with sub-section (1) and (1A) so as to provide that the deduction specified in the said section in respect of an an Unit of International Financial Services Centre shall be allowed at one hundred per cent. for ten years. In addition the deductions may, at the option of the assessee, be claimed by him for any ten consecutive assessment years out of fifteen years beginning with the assessment year relevant to the previous year in which the permission referred to in clause (a) of sub-section (1) of the said section was obtained.
This amendment will take effect from 1st April, 2020 and will, accordingly, apply in relation to the assessment year 2020-2021 and subsequent assessment years.
Clause 33 of the Bill seeks to amend section 115A of the Income-tax Act relating to tax on dividends, royalty and technical service fees in the case of foreign companies.
Sub-section (4) of the said section provides that no deduction under Chapter VI-A shall be allowed in respect of income as specified in clause (a) or be allowed in the manner provided in clause (b) thereof to an assessee referred to in sub-section (1), where the gross total income of such assessee consists of only or includes any income referred to in clause (a) of the said sub-section (1).
It is proposed to insert a proviso to the said sub-section so as to exempt a Unit of an International Financial Services, for which deduction is allowed under section 80LA, from the applicability of the provisions of that sub-section.
This amendment will take effect from 1st April, 2020 and will, accordingly, apply in relation to the assessment year 2020-2021 and subsequent assessment years.
