Tax incentives for units located in International Financial Services Centre (IFSC) under Union Budget 2021

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.

[Clauses 4,5,15, 17, 21, 23 and 30]

Text of the Relevant Clause of the Finance Bill 2021

Clause 4 of the Bill seeks to amend section 9A of the Income-tax Act relating to certain activities not to constitute business connection in India.

Sub-section (3) and (4) of the said section provide for certain conditions for the applicability of the section.

It is proposed to insert sub-section (8A) to the said section so as 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) shall not apply or shall apply with such modifications, as specified in such notification, in case of an eligible investment fund and its eligible fund manager, if such fund manager is located in an International Financial Services Centre, as defined in clause (a) of the Explanation to section 80LA, which has commenced its operations on or before 31st March, 2024.

This amendment will take effect from 1st April, 2022 and will, accordingly, apply in relation to the assessment year 2022-2023 and subsequent assessment years.

Clause 5 of the Bill seeks to amend section 10 of the Income-tax Act relating to incomes not included in total income.

The said section provides that in computing the total income of a previous year of any person, certain categories of income shall not be included in the total income.

Clause 4D of said section provides exemption for any income accrued or arisen to, or received by a specified fund as a result of transfer of capital asset referred to in clause (viiab) of section 47, on a recognised stock exchange located in any International Financial Services Centre and where the consideration for such transaction is paid or payable in convertible foreign exchange or as a result of transfer of securities (other than shares in a company resident in India) or any income from securities issued by a non-resident ( not being a permanent establishment of a non-resident in India) and where such income otherwise does not accrue or arise in India or any income from a securitisation trust which is chargeable under the head “Profits and gains of business or profession”, to the extent such income accrued or arisen to, or is received, is attributable to units held by non-resident (not being the permanent establishment of a non-resident in India).

It is proposed to amend the said clause so as to provide that the said exemption 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, and computed in the manner as may be provided by rules.

It is further proposed to insert a new clause (4E) in the said section 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 an International Financial Services Centre as referred to in sub-section (1A) of section 80LA, which fulfills such conditions as may be provided by rules.

It is also proposed to insert a new clause (4F) in the said section 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 as referred to in sub-section (1A) of section 80LA, if the unit is eligible for deduction under section 80LA for that previous year and has commenced its operations on or before 31st March, 2024.

These amendments will take effect from 1st April, 2022 and will, accordingly, apply in relation to the assessment year 2022-2023 and subsequent assessment years.

Clause 15 of the Bill seeks to amend section 47 of the Income-tax Act relating to transactions not regarded as transfer.

The said section, inter alia, provides that any transfer of a capital asset by the predecessor co-operative bank to the successor co-operative bank in a case of business reorganisation shall not be regarded as transfer.

It is proposed to amend clause (vica) of the said section to expand the scope of the said clause so as to provide that any transfer of a capital asset by the primary co-operative bank which has been converted into a banking company as a result of conversion shall not be considered as transfer for the purposes of capital gains.

Further, it is also proposed to amend clause (vicb) of the said section so as to provide that the allotment of shares of the converted banking company to the shareholders of the predecessor co-operative bank as a result of this conversion shall not be treated as transfer for the purposes of capital gains.

It is also proposed to amend the Explanation to clause (vicb) of the said section so as to provide that the expression “converted banking company” shall have the meaning assigned to it in section 44DB.

These amendments will take effect from 1st April, 2021 and will, accordingly, apply in relation to the assessment year 2021-2022 and subsequent assessment years.

It is proposed to insert new clauses (viiac) and (viiad) 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 the purpose of Capital gains tax. It is further proposed that the allotment of shares of the resultant fund to the shareholders of the original fund as a result of this relocation shall not be treated as transfer for the purpose of capital gains.

It is also proposed to define the expressions “original Fund”, “relocation” and “resultant fund”.

These amendments will take effect from 1st April, 2022 and will, accordingly, apply in relation to the assessment year 2022-2023 and subsequent assessment years.

Clause 17 of the Bill seeks to amend section 49 of the Income-tax Act relating to cost with reference to certain modes of acquisition.

Sub-section (1) of the said section provides that where the capital asset became the property of the assessee under certain situations, the cost of acquisition of the asset shall be deemed to be the cost for which the previous owner of the property acquired it, as increased by the cost of any improvement of the assets incurred or borne by the previous owner or the assessee, as the case may be.

It is proposed to amend sub-clause (e) of clause (iii) of the said sub-section so as to include the transfer referred to in clause (viiac) and (viiad) of section 47 also within the purview of that sub-section (1).

This amendment will take effect from 1st April, 2022 and will, accordingly, apply in relation to the assessment year 2022-2023 and subsequent assessment years.

Clause 21 of the Bill seeks to amend section 56 of the Income-tax Act relating to income from other sources.

Sub-clause (b) of clause (x) of sub-section (2) of the said section, inter alia, provides that where any person receives any immovable property in any previous year from any person or persons on or after the 1st day of April, 2017 for a consideration, and where the stamp duty value of such property exceeds ten per cent. of the consideration and the excess amount thereof is more than fifty thousand rupees, it shall be charged to tax under the head income from other sources.

It is proposed to insert a fourth proviso to the said clause so as to provide that in case of property being referred to in the second proviso to sub-section (1) of section 43CA, the provisions of sub-item (ii) of item (B) of the said clause shall have the effect as if for the words “ten per cent.”, the words “twenty per cent.” had been substituted.

This amendment will take effect from 1st April, 2021 and will, accordingly, apply in relation to the assessment year 2021-2022 and subsequent assessment years.

Clause (x) of sub-section (2) of the said section, inter alia, provides that the assets received without or inadequate consideration shall be charged to tax under the head “Income from other sources”.

It is proposed to amend the proviso to said clause of the said sub-section so as to exclude the transfer of capital asset between the original Fund and the resultant fund, which are not regarded as transfer under clause (viiac) or clause (viiad) of section 47, from the scope of clause (x) of the said sub-section.

This amendment will take effect from 1st April, 2022 and will, accordingly, apply in relation to the assessment year 2022-2023 and subsequent assessment years.

Clause 23 of the Bill seeks to amend section 79 of the Income-tax Act relating to carry forward and set off of losses in case of certain companies.

Sub-section (1) of the said section provides that where a change in shareholding has taken place during the previous year in the case of a company, not being a company in which the public are substantially interested, no loss incurred in any year prior to the previous year shall be carried forward and set off against the income of the previous year, unless on the last day of the previous year, the shares of the company carrying not less than fifty-one per cent. of the voting power were beneficially held by persons who beneficially held shares of the company carrying not less than fifty-one per cent. of the voting power on the last day of the year or years in which the loss was incurred. Further sub-section (2) of said section provides that the exceptions to the above provision contained in the said sub-section.

It is proposed to insert a new clause in sub-section (2) to the said section so as to provide that nothing contained in the section shall apply to a case to the extent that a change in the shareholding takes place during the previous year on account of relocation referred to in the Explanation to clause (viiac) and (viiad) of section 47.

This amendment will take effect from 1st April, 2022 and will, accordingly, apply in relation to the assessment year 2022-2023 and subsequent assessment years.

Clause 30 of the Bill seeks to amend section 115AD of the Income-tax Act relating to tax on income of Specified Fund or Foreign Institutional Investors from securities or capital gains arising from their transfer.

It is proposed to amend the said section so as to provide that income of investment division of an offshore banking unit of a non-resident from securities or capital gains arising from their transfer shall also be taxed at the rate of ten per cent. under the provisions of the said section.

It is further proposed to insert a new sub-section (1B) in the said section so as to provide investment division of an offshore banking unit, the provision of this section shall apply to the extent of income that is attributable to the investment division of such banking unit referred to in sub-clause (ii) of clause (c) to the Explanation to clause (4D) of section 10 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, calculated in the prescribed manner.

It is also proposed to define the expression “investment division of an offshore banking unit”.

These amendments will take effect from 1st April, 2022 and will, accordingly, apply in relation to the assessment year 2022-2023 and subsequent assessment years.

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