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Budget 2021: Tax Incentives For International Financial Services Centre (Part 4)

04 Mar 2021

Budget 2021 seeks to incentivize a host of activities undertaken in IFSC such as setting up of investment divisions of offshore banking units in IFSC, relocation of offshore funds in India, aircraft leasing activity in IFSC etc.

We have seen a considerable push from the government to make the International Financial Services Centre (IFSC) in GIFT City, a global financial hub. With the Finance Bill, 2021 (Bill), a slew of measures have been proposed to boost business activity in IFSC. We discuss some of these developments below.

  • Promotion of offshore fund management from IFSC

    A Business connection is a form of taxable presence in another country, similar to the Permanent Establishment (PE) concept under tax treaties. Business connection provisions under the Income Tax Act (ITA) seek to determine income deemed to accrue or arise in India. Generally, the concept of ‘business connection’ under the ITA is much broader than the concept of PE.

    Section 9A of the ITA was however introduced to provide for a specific carve out from the application of these business connection provisions, subject to the taxpayer fulfilling certain conditions enumerated therein (Carve out Conditions). The Bill now provides that the government may notify relaxations in the fulfillment of one or more of such Carve Out Conditions for an eligible investment fund or its eligible fund manager, if the fund manager is located in an IFSC and has commenced operations on or before 31 March 2024. Thus, the full import of this provision would only be determined once the Government actually notifies the relaxations that would be available to the eligible fund manager located in IFSC.

  • Promotion of setting up of investment divisions in IFSC by offshore banking units

    Under Section 47(viiab) of the ITA, the transfer of a capital asset being specified bonds or GDRs, rupee denominated bonds of an Indian company, derivatives or other notified securities by a non-resident on a recognized stock exchange located in an IFSC is not treated as a taxable transfer (provided the consideration for the transfer is payable in foreign exchange). Section 10(4D) of the ITA further exempts income accrued or arising to a ‘specified fund’ (being a category-III Alternative Investment Fund (AIF) located in an IFSC of which all the units are held by non-residents (other than units held by a sponsor or manager)) as a result of a transfer referred to in Section 47(viiab) of the ITA.

    The Bill proposes to extend the scope of Section 10(4D) to provide that the exemption will also be available for any income accruing or arising to an ‘investment division of offshore banking unit’ (to the extent attributable to it and computed in the prescribed manner).

    Further, the Bill proposes to amend the definition of ‘specified fund’ to include ‘investment division of an offshore banking unit’ which has been granted a category III AIF registration, subject to the fulfilment of prescribed conditions. Additionally, ‘investment division of offshore banking unit’ is proposed to be defined as an investment division of a banking unit of a non–resident located in an IFSC and which has commenced operations on or before the 31 March 2024.

    The Bill also proposes to extend the concessional tax rates provided under Section 115AD of the ITA to such investment division of an offshore banking unit in the manner applicable to a ‘specified fund’. The provisions of Section 115AD will 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, calculated in the prescribed manner.

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