Introduction:
International Financial Service Centre (IFSC) stands as a beacon in the global financial landscape, providing a specialized zone within a Special Economic Zone (SEZ). Its development aims to create a hub where financial entities can thrive, offering an array of services such as corporate banking, insurance, investment, fund management, and securities trading across borders. This article will delve into the complexities and advantages of IFSC, exploring its various relaxations and exemptions that make it an attractive destination for financial entities looking to establish a global footprint.
Understanding IFSC: A Specialized Financial Hub
IFSC, as defined by the Special Economic Zones Act, 2005 (SEZ Act), is a designated area developed within an SEZ with the purpose of establishing a global financial hub. The Central Government holds the authority to set up an IFSC, and it’s crucial to note that only one IFSC can be approved within a specific SEZ. The establishment of IFSCs is a strategic move to simplify and centralize financial services, creating an environment conducive to international transactions.
To oversee and regulate financial activities within IFSC, the International Financial Services Centres Authority (IFSCA) was set up under the International Financial Services Centres Authority Act, 2019 (IFSCA Act). This authority replaces several regulatory bodies, including the Reserve Bank of India (RBI), Securities and Exchange Board of India (SEBI), Insurance Regulatory and Development Authority of India (IRDAI), and Pension Fund Regulatory and Development Authority (PFRDA), acting as a unified regulatory body.
Companies Act, 2013: Relevance and Relaxations
Entities operating within IFSC are subject to the Companies Act, 2013. However, unlike regular domestic entities, IFSC entities enjoy various relaxations and exemptions. It’s important to highlight that the powers, functions, and duties of the Ministry of Corporate Affairs (MCA) under the Companies Act, 2013, are not subsumed under the IFSCA Act. This ensures a streamlined regulatory environment, allowing IFSC entities to operate with certain flexibilities.
Foreign Exchange Management Act (FEMA): Transactions Beyond Boundaries
One of the significant advantages for IFSC entities is that any transaction between a foreign investor or customer and the IFSC entity falls outside the purview of the Foreign Exchange Management Act, 1999 (FEMA). This exemption simplifies cross-border transactions, providing flexibility and ease of doing business for international clients within the IFSC.
Direct Taxation and Income Tax Benefits:
For direct tax purposes, IFSC entities are considered entities in the domestic tariff area. This means they are subject to provisions applicable to domestic entities unless specific exemptions or exclusions are provided in the Income Tax Act, 1961 (IT Act). One of the notable exemptions is related to income tax. According to section 80LA(1A) read with 80LA(2), an IFSC entity is eligible for a deduction of 100% of its income for any ten consecutive years out of fifteen for income from its business for which it has been approved for setting up in the IFSC.
It’s important to note that the Minimum Alternate Tax (MAT) or Alternate Minimum Tax (AMT) is a self-contained calculation that does not provide for a deduction under section 80LA. Consequently, an IFSC entity is still required to pay MAT or AMT, but the MAT credit can be carried forward for 15 years, while AMT credit is available for only 5 years.
Interest Payments to Non-Residents (NR): Exemptions and Advantages
Section 10(15)(ix) of the Income Tax Act brings forth an important exemption for IFSC entities. Any income by way of interest payable to a non-resident (NR) by an IFSC unit in respect of monies borrowed by it on or after September 1, 2019, shall be exempt from tax. This exemption not only benefits the IFSC entity by reducing its tax liability but also streamlines transactions with non-residents.
Furthermore, interest on deposit in Offshore Banking Units is covered under section 10(15)(viii), where any income by way of interest received by a non-resident or a person who is not ordinarily resident in India, on a deposit made in an Offshore Banking Unit, is exempted from income tax. Additionally, withholding of tax is also exempted in this regard pursuant to section 197A(1D).
Capital Gains in IFSC: A Unique Perspective
When it comes to capital gains, the IFSC provides unique advantages. According to section 47(viiab) of the Income Tax Act, the sale of certain specified securities listed on a stock exchange in IFSC by a non-resident (NR) is not regarded as a transfer. These specified securities include bonds, units of an Alternative Investment Fund (AIF), business trust, or a Mutual Fund, foreign currency denominated equity share of a company, derivative, and Global Depository Receipts (GDR). However, the consideration for such transactions should be paid or payable in foreign currency, adding a distinctive dimension to capital gains within the IFSC.
Income from Securitisation Trust and Special Provisions:
Section 10(4D) of the Income Tax Act provides an exemption for income received by an Offshore Banking Unit from a securitisation trust. This income, which falls under the head “Profits and gains of business or profession,” is exempt, further contributing to the favorable tax environment within the IFSC.
Aircraft and Ship Leasing: A Strategic Move for NRs
The IFSC extends its advantages to non-residents involved in aircraft or ship leasing. Any income of a non-resident by way of royalty or interest, on account of the lease of an aircraft or a ship in a previous year, paid by an IFSC unit, is eligible for exemption. This applies if the IFSC unit has commenced its operations on or before March 31, 2024, providing a strategic move for non-residents engaged in such leasing activities within the IFSC.
Goods and Services Tax (GST) in IFSC: A Closer Look
Entities operating within IFSC are subject to GST laws similar to those applicable to domestic entities. However, specific exemptions outlined in Notification No. 2/2018-Central Tax (Rate) provide a ‘Nil’ rate of tax on services by an intermediary of financial services located in IFSC to a customer located outside India. This exemption aligns with the international nature of transactions within IFSC, promoting seamless business operations and fostering a competitive environment.
Conclusion: Unlocking the Potential of IFSC Entities
In conclusion, the International Financial Service Centre (IFSC) emerges as a dynamic and advantageous platform for financial entities seeking a global presence. From regulatory advantages to strategic tax exemptions, the IFSC offers a unique environment designed to facilitate international financial transactions. The relaxations and exemptions provided in areas such as income tax, capital gains, and GST contribute to making IFSC a preferred destination for financial institutions looking to establish a strong and competitive foothold in the global market.
Understanding the intricacies of IFSC is paramount for financial entities aiming to capitalize on its potential. The comprehensive analysis of its various facets, from regulatory authority to tax benefits, provides a holistic view of the opportunities that IFSC presents. As the financial landscape continues to evolve, IFSC remains at the forefront, offering a blend of regulatory flexibility and strategic advantages. Unlocking the potential of IFSC entities requires a nuanced approach, leveraging the specific relaxations and exemptions tailored for financial success in the international arena.
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