Benefits under the Income Tax Act, 1961 for units located in an International Financial Services Centre (IFSC)

An International Financial Services Centre (IFSC) is an institution which deals with financial services, financial products and financial transaction which are undertaken on an international level.

In India, the only IFSC is located in Gandhinagar, Gujarat commonly known as the Gujarat International Finance Tec-City or the GIFT City.

Under the Income Tax Act, 1961, the IFSC is given a special recognition and is provided with various benefits. The benefits available to units in an IFSC under the Income Tax Act, 1961 are tabulated below:

Section Description of the section For a Normal organization For organizations located in IFSC Inferences drawn
112A and 10(38) Tax on long term capital gains in certain cases Under section 112A of the act,

i) any capital gain arising from transfer of Long term capital assets being an Equity Share in a Company or units of an equity oriented fund or units of a business trust,

ii) on which securities transaction tax has been paid at the required time and

iii) the capital gain exceeds Rs. 1,00,000

such amount in excess of Rs. 1,00,000 shall be taxable at the rate of 10%.

Where the transfer takes place through a recognized stock exchange located in the IFSC, the provisions of section 112A shall not apply. Section 10(38) provides exemption from long term capital gain on transfer of equity shares or units of equity oriented funds or units of business trust on which securities transaction tax is paid. Proviso to section 10(38) provides the where the transaction is undertaken on a stock exchange situated in IFSC, the LTCG shall be exempt even though STT is not paid. Whereas, Long term capital gain on transfer of Equity Share in a Company or units of an equity oriented fund or units of a business trust on which STT is paid is taxable @ 10% where the capital gain exceeds Rs. 1,00,000. The long term capital gain on transfer of the above mentioned capital asset through a stock exchange located in IFSC is totally exempt even if STT is not paid.
111A Tax on short term capital gains in certain cases Under section 111A of the act,

i) any capital gain arising from transfer of short term capital assets being an Equity Share in a Company or units of an equity oriented fund or units of a business trust and

ii) such transaction is chargeable to securities transaction tax

shall be taxable at the rate of 15%.

Proviso to section 111A provides that the where the transaction is undertaken on a stock exchange situated in an IFSC,  the STCG shall be taxable at the rate of 15% even though STT is not paid. One additional condition is that the consideration for such transaction shall be paid or payable in foreign currency. For a normal organization there is a requirement of paying STT on the transaction. At the same time, where the transaction is undertaken on a stock exchange situated in IFSC, though the tax rate is same, the concessional rate of 15% will be applicable even if STT is not paid.
115-O Tax on distributed profits of domestic Companies. Section 115-O talks about charging Dividend Distribution Tax (DDT). Under this section, where a Domestic Company declares, distributes or pays dividend, it shall be chargeable to DDT at the rate of 15% plus 12% surcharge plus 4% Health and Education Cess. The rate comes up to 17.472% in aggregate. This rate is applied on 85% of the dividend amount (gross up concept applicable). Hence the effective rate would be 17.472% divided by 85% which comes to 20.555% of the Dividend amount. The provisions of Section 115-O shall not be applicable to units located in the IFSC. Since, DDT is not available for set off against the normal income tax payable by a Company, it becomes an additional cost to the Companies. Hence, the units located in IFSC enjoy tax concession to the extent of 20.555% on dividends distributed, declared or paid.
80LA Deductions in respect of certain incomes of Offshore Banking Units and International Financial Services Centre. Section 80LA provides income based deductions for units located in an IFSC from payment of income tax. The exemption shall be as under:

i) 100% deduction for the first five consecutive years beginning from the year in which permission from the respective regulatory authority was obtained

ii) 50% deduction for the next five consecutive financial years.

115JB Special provision for payment of tax by certain companies Section 115JB provides for levy of Minimum Alternate Tax (MAT). In case of a Company, where the TAX on the total income is less than 18.5% of the Book Profit (as computed in accordance with the provisions of section 115JB), then the Company shall instead of paying tax as per the normal provision, pay tax at the rate of 18.5% of the Book Profit. For a Company located in IFSC, the provisions of section 115JB shall be as follows:

where the TAX on the total income is less than 9% of the Book Profit (as computed in accordance with the provisions of section 115JB), then the Company shall instead of paying tax as per the normal provision, pay tax @ 9% of the Book Profit.

Thus, for a Company located in IFSC, the rate of MAT is 9% instead of 18.5%.
115JC Special provisions for payment of tax by certain persons other than a company. Whereas section 115JB provides for levy of MAT, section 115JC provides for levy of Alternate Minimum Tax in case of an assessee other than a Company. In case of an assessee other than a Company, where the TAX on the total income is less than 18.5% of the Adjusted Total Income (as computed in accordance with the provisions of section 115JC), then the assessee shall instead of paying tax as per the normal provision, pay tax @ 18.5% of the Adjusted Total Income. For an assessee other than a Company located in IFSC, the provisions of section 115JC shall be as follows:

where the TAX on the total income is less than 9% of the Adjusted total Income (as computed in accordance with the provisions of section 115JC), then the assessee shall instead of paying tax as per the normal provision, pay tax @ 9% of the Adjusted Total Income.

Thus, for a unit other than a Company located in IFSC, the rate of AMT is 9% instead of 18.5%.
47 Transactions not regarded as transfer Under clause viiab of Section 47, any transfer of Capital Asset being,

i) bond or Global Depository Receipt

ii) rupee denominated bond of an Indian company

iii) derivative

made by a non-resident on a recognized stock exchange located in any International Financial Services Centre and where the consideration for such transaction is paid or payable in foreign currency is not considered as a transfer and hence not liable to Capital Gain Tax.

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