Direct Tax Alert - CBDT issues notification to further enhance the benefits for IFSC

Background

There are various provisions under the Income-tax Act, 1961 (IT Act) and the Income-tax Rules, 1962 (IT Rules) in relation to exemptions and compliances in relation to International Financial Services Centre (IFSC). The Central Board of Direct Taxes (CBDT) vide its notification¹ dated 17 July 2023 amended the following section and Rules to further grant relief to investors and funds in IFSC.

We, at BDO in India, have analysed and summarised this notification hereunder.

Amendment in Section 10(4E) of the IT Act

1. Section 10(4E) of the IT Act was inserted by Finance Act, 2021 in order to grant exemption to any income accrued or arisen to, or received by a Non-Resident as a result of the transfer of non-deliverable forward contracts entered into with an offshore banking unit of IFSC which commenced operations on or before the 31 March 2024 and fulfils the prescribed conditions.
 

2. The said conditions in relation to section 10(4E) of the IT Act were notified by the CBDT vide its notification dated 10 December 2021 by inserting Rule 21AK in the IT Rules.

The CBDT has now amended the provisions of Rule 21AK of the IT Rules so as to also include income arising to a non-resident as a result of the distribution of income on offshore derivative instruments within the scope of exemption under section 10(4E) of the IT Act.

Exemption under section 10(4E) of the IT Act shall be available only if the following conditions are satisfied.

(a) The non-resident enters into the non-deliverable forward contract with an offshore banking unit of an IFSC which holds a valid certificate of registration granted under International Financial Services Centres Authority (Banking) Regulations, 2020 by the International Financial Services Centres Authority; and

(b) The non-resident does not enter into such contract through or on behalf of its permanent establishment in India.

Amendment in Rule 114AAB of the IT Rules

3. In 2020, the CBDT inserted Rule 114AAB in the IT Rules to provide for an exemption to non-resident investors/ unit holders earning income from investments in Alternative Investment Funds (AIFs) set up in IFSC, from the requirement of obtaining a Permanent Account Number under section 139A of the IT Act, subject to certain conditions.

The said rule defined the term ‘Specified fund’ to include Category I and Category II AIF regulated under the Securities and Exchange Board of India (Alternative Investment Funds) Regulations, 2012 made under the Securities and Exchange Board of India Act, 1992(15 of 1992) or International Financial Services Centres Authority Act, 2019 (50 of 2019) and which is located in any IFSC or a specified fund referred to in sub-clause (i) of clause (c) of Explanation to clause (4D) of section 10 of the IT Act.

CBDT has now amended the said definition to include the International Financial Services Centres Authority (Fund Management) Regulations, 202² under its ambit.

Amendment in Form 64D

4. A similar amendment has been made in Form 64D to include funds registered under the International Financial Services Centres Authority (Fund Management) Regulations, 2022.

Amendment in Form 10CCF

5. Section 80LA of the IT Act provides full exemption from income tax to offshore banking units situated in Special Economic Zone, subject to satisfaction of prescribed conditions. However, to claim an exemption under the said section, a report from a Chartered Accountant in Form No. 10CCF certifying that the deduction has been correctly claimed is required to be submitted along with the return of income.

CBDT vide its notification has amended Form 10CCF to include a ‘Unit in IFSC’. Consequently, a unit in IFSC will have to duly file Form 10CCF to avail of the deductions prescribed under section 80LA of the IT Act.

BDO in India Comments

Over recent times, the Government of India has proactively taken various steps to grant beneficial tax treatments to the units located in IFSC and to the investors willing to invest in IFSC to make it a global financial hub. The notification issued by CBDT is another step taken to incentivise investments in IFSC so as to boost investor confidence in IFSC. This will aid in augmenting inflows from several foreign countries in the Indian IFSC.