Tax Incentives & Reforms for IFSC GIFT CITY in Union Budget 2024

The International Financial Services Centre ( IFSCA Official ) is a special zone offering financial services to both non-residents and residents in any currency except the Indian Rupee. To encourage the development of a world-class financial hub in India, several tax concessions have been provided to units located in IFSC over the past few years. Continuing from previous budgets, numerous announcements have been made regarding GIFT City IFSC in the Union Budget 2024.

Key Announcements for IFSC Specific

Expansion of Exemptions for Specified Funds

Current Provision: Certain funds can claim tax exemptions under section 10.

Proposed Change: The scope will be expanded to include retail funds and Exchange Traded Funds (ETFs) established in India. These funds must be certified and regulated under the IFSCA (Fund Management) Regulations, 2022.

Impact: Historically, retail schemes and ETFs in IFSC have not taken off due to the lack of a specific tax regime. The new tax framework, aligning with Category III IFSC AIFs (Specified Funds), will attract global fund managers to set up retail schemes and ETFs in IFSC, potentially leading to a more vibrant fund management ecosystem. Additionally, no surcharge will apply on advance tax for IFSC-based Specified Funds.

Tax Exemption for Core Settlement Guarantee Funds

Current Provision: Income of Core Settlement Guarantee Funds by recognized clearing corporations is exempt from tax.

Proposed Change: The definition of “recognized clearing corporation” will be updated to include those defined under the IFSCA (Market Infrastructure Institutions) Regulations, 2021.

Relaxation on Proof of Source for Venture Capital Funds (VCFs)

Current Provision: Section 68 requires the explanation of the source of funds credited in the assesses books. This additional proof requirement does not apply to VCFs registered with SEBI.

Proposed Change: The same relaxation will be extended to VCFs regulated by IFSCA.

Exemption for Finance Companies from Thin Capitalization Rules

Current Provision: Section 94B restricts the deduction of interest expenses for Indian companies or foreign companies' permanent establishments on loans from non-resident associated enterprises.

Proposed Change: Finance companies located in IFSC, defined under the IFSCA (Finance Company) Regulations, 2021, will be exempted from these restrictions.

Impact: Currently, interest expense is disallowed beyond 30% of specified earnings where the borrowings are from a non-resident related party. Similar to Indian financial institutions, IFSC finance companies are now exempted from such thin capitalization (interest disallowance) provisions, promoting the setup of finance companies in GIFT IFSC, especially captive treasury units.

Promotion of Domestic Cruise Ship Operations by Non-Residents

Objective: To make India an attractive cruise tourism destination and encourage the participation of international cruise-ship operators, thereby promoting global best practices in the cruise-shipping industry.

Proposed Changes:

Presumptive Taxation Regime: A new section 44BBC will be introduced, which deems 20% of the aggregate amount received or receivable by, or paid or payable to, the non-resident cruise-ship operator on account of passenger carriage as profits and gains from this business lease

Rental Exemption: Lease rentals paid by a company opting for the presumptive regime under section 44BBC will be exempt in the hands of the recipient company if both companies are subsidiaries of the same holding company. This will be achieved through a new clause (15B) in section 10. This exemption will be available up to the assessment year 2030-31.

Replacement of Section 44B: The provisions of section 44B, which relate to presumptive taxation for the shipping business of non-residents, will no longer apply to the cruise-ship business.

Announcement: Necessary changes will be provided for an efficient and flexible mode for financing the leasing of aircraft and ships, and pooled funds of private equity through a ‘variable company structure’.

Abolition of Angel Tax

Current Provision: Section 56(2) (viib) of the Act requires companies to pay tax on the amount received for shares exceeding their fair market value.

Proposed Change: The government has decided to abolish this provision. From the assessment year 2025-26, section 56(2) (viib) will no longer apply.

General Announcements also affecting IFSC Units

Increase in Limit of Remuneration to Working Partners of a Firm Allowed as Deduction

• Current Provision: Section 40(b)(v) specifies the limit of remuneration to working partners in a partnership firm allowed as a deduction.

For the first Rs. 3,00,000 of book profit or in case of a loss: The limit is increased to Rs. 1,50,000 or 90% of the book profit, whichever is more.

For the balance of the book profit: The rate remains at 60%.

• Proposed Change: The limit will be increased as follows:

For the first Rs. 6,00,000 of book profit or in case of a loss: The limit is increased to Rs. 3,00,000 or 90% of the book profit, whichever is more.

For the balance of the book profit: The rate remains at 60%.

TDS on Payment to Partners by Firms

Current Provision: There is no provision for the deduction of tax at source (TDS) on payments of salary, remuneration, interest, bonus, or commission to partners by the partnership firm.

Proposed Change: A new TDS section 194T will be inserted. Payments such as salary, remuneration, commission, bonus, and interest to any account (including the capital account) of the partner of the firm will now be subject to TDS if the aggregate amount exceeds Rs 20,000 in a financial year. The applicable TDS rate will be 10%.

Certain TDS Related Relaxations Granted shall also to be considered

Rationalization and Simplification of Taxation of Capital Gains for NR Investors

• Holding Periods:

Listed Securities: The holding period will be 12 months.

Other Assets: The holding period will be 24 months.

• Short-Term Capital Gains (STCG):

STT Paid Equity Shares, Units of Equity Oriented Mutual Funds, and Business Trusts: The STCG rate will increase from 15% to 20%.

Other STCG: Taxed at the applicable rate.

• Long-Term Capital Gains (LTCG)

General Rate: 12.5% for all categories of assets.

Exemption: Up to Rs. 1.25 lakh for LTCG under section 112A on STT paid equity shares, units of equity-oriented fund, and business trust.

Removal of Indexation: Indexation benefit under section 48 for property, gold, and other unlisted assets will be removed.

Unlisted Debentures and Bonds: Taxed at applicable rates under the newly proposed section 50AA.

• Parity in Taxation: Amendments to sections 115AD, 115AB, 115AC, 115ACA, and 115E to align the taxation rates for residents and non-residents.
• Withholding Tax Provisions: Amendments to sections 196B and 196C to align with the proposed changes in capital gains tax rates.
• Effective Date: These proposals are to be effective from July 23, 2024.

Positive Impact and Remaining Challenges

These changes are positive steps towards boosting the IFSC ecosystem. However, several expected changes have not been addressed:

• Tax framework for ODIs issued by non-banking units.
• Tax framework for the relocation of holding companies to IFSC.
• Clarity on the taxation of insurance proceeds received from an IFSC insurance company.

These amendments will take effect from April 1, 2025, and apply to the assessment year 2025-26 and subsequent years.

In conclusion, the International Financial Services Centre (IFSC) continues to be a cornerstone of India's strategy to develop a world-class financial hub. The Union Budget 2024 builds on the momentum of previous years by introducing a host of new measures aimed at enhancing the attractiveness and competitiveness of GIFT City IFSC. These include expanding tax exemptions, simplifying tax structures, and providing regulatory relaxations, all designed to foster a more dynamic and robust financial ecosystem. As these initiatives take effect, they are expected to significantly bolster the presence of global financial players in India, further solidifying IFSC's status as a premier international financial services destination.

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