GIFT CITY AND IFSCs - Are they India's new friends?

Union Finance Minister Nirmala Sitharaman through Union Budget 2021 has clarified that with a view to facilitate setting up of a world class fintech hub in Gujarat International Finance Tec (GIFT). In addition to the tax incentives already provided, the budget 2021 has introduced tax holiday for capital gains for aircraft leasing companies, tax exemption for aircraft lease rentals paid to foreign lessors, tax incentive for relocating foreign funds in the IFSC and to allow tax exemption to the investment division of foreign banks located in IFSC. In light of the same, government has come up with a plethora of exemptions and amendments such as:

Amendments in section 80LA of the Income-tax act which deals with the deduction or certain incomes of offshore banking units wherein tax concession under this section is provided to Offshore Banking Unit and International Financial service centre. Under this section, eligible assessee will get tax deduction on profit for specified period provided certain conditions given under this section is satisfied. Deduction under section 80-LA can be claimed for 10 consecutive years. Amount of deduction is 100% of income for the first 5 years and 50% of income for the next 5 years.

Section 80LA has included under its purview any income arising from the transfer of an asset, being an aircraft or aircraft engines which was leased by a unit to a domestic company engaged in the business of operation of aircraft subject to the condition that the unit has commenced operation on or before the 31st March 2024.

Amendments in section 9A to provide that the provisions mentioned therein shall not apply 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.

Amendments in section 10 and new insertions

Section 10(4D) 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.

What is the meaning of Offshore Banking Unit?

As per Section 2(zc) of the Special Economic Zone Act, 2005, Unit means a Unit set up by an entrepreneur in a Special Economic Zone and includes an Offshore Banking Unit. Thus, it can be said that a Offshore Banking Unit means a branch of a bank located in SEZ. The branch needs to obtain the permission under the Banking Regulation Act, 1949 [ Section 23(1)(a)].

New clause (4E) in section 10 of the act is proposed to be inserted 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.

New clause (4F) in section 10 of the Act shall be inserted 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.

New clause (23FF) in of section 10 of the Act shall be inserted 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.

Further there would be no capital gains on transfer of funds from the original fund to the resultant fund. Resultant fund for the purposes of the same has been defined as follows:

“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.”

Amendments in section 47 of the act 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.

The term “Relocation” for the purposes of the tax exemption is 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.