Budget 2024 proposes significant tax incentives for International Financial Services Centres (IFSC) to boost India’s financial infrastructure. Key amendments include expanding the range of exempted funds to include retail and Exchange Traded Funds regulated under the International Financial Services Centres Authority (IFSCA) Act, 2019. Core Settlement Guarantee Funds set up by recognized clearing corporations will also benefit from tax exemptions. Additionally, the Finance Act, 2023’s provisions, which relaxed proof requirements for Venture Capital Funds (VCFs) regulated by SEBI, will now extend to VCFs in IFSC. Furthermore, Section 94B of the Income-tax Act will be revised to exclude finance companies in IFSC from interest deduction limits, promoting financial operations within these centres. These amendments are set to take effect from April 1, 2025, impacting the assessment year 2025-26 and beyond.
Budget 2024: Tax incentives to International Financial Services Centre (ISFCA)
International Financial Services Centre (IFSC) is a jurisdiction that provides financial services to non-residents and residents, to the extent permissible under the current regulations, in any currency except Indian Rupee. In order to promote the development of world-class financial infrastructure in India, several tax concessions have been provided to units located in IFSC, under the Act, over the past few years.
2. In order to further incentivize operations from IFSC, it is proposed to make the following amendments:
(A) Item (I) of sub-clause (i) of clause (c) of Explanation to clause (4D) of section 10, to be amended to expand the ambit of specified funds which can claim exemption under the said section, to include retail funds and Exchange Traded Funds in IFSC. Specified funds shall now include funds established or incorporated in India in the form of a trust or a company or a limited liability partnership or a body corporate, which have been granted a certificate as a retail scheme or an Exchange Traded Fund and are regulated under the International Financial Services Centres Authority (Fund Management) Regulations, 2022, made under the International Financial Services Centres Authority (IFSCA) Act, 2019 and satisfy such conditions as may be prescribed.
(B) Specified income of Core Settlement Guarantee Funds set up by recognised clearing corporations in IFSC, is proposed to be exempted by amending the definition of “recognised clearing corporation” and “regulations” in the Explanation to the clause (23EE) of section 10 of the Act. The definition of “recognised clearing corporation” shall now include recognised clearing corporation as defined in clause (n) of sub-regulation (1) of regulation 2 of the IFSCA (Market Infrastructure Institutions) Regulations, 2021 made under the IFSCA Act, 2019. The definition of “regulations” shall now include the IFSCA (Market Infrastructure Institutions) Regulations, 2021.
(C) Section 68 of the Act provides that where any sum is found to be credited in the books of an assessee maintained for any previous year, and the assessee offers no explanation about the nature and source thereof or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory, the sum so credited may be charged to income-tax as the income of the assessee of that previous year.
(i) Finance Act, 2023 amended the provisions of section 68 so as to provide that the nature and source of any sum, whether in form of loan or borrowing, or any other liability credited in the books of an assessee shall be treated as explained only if the source of funds is also explained in the hands of the creditor or entry provider. However, this additional onus of proof of satisfactorily explaining the source in the hands of the creditor, would not apply if the creditor is a well regulated entity, i.e., it is a Venture Capital Fund (VCF) or Venture Capital Company (VCC) registered with SEBI. Section 68 accordingly makes a reference to the definition of VCF/VCC in the Explanation to clause (23FB) of section 10.
(ii) It is now proposed to extend the relaxation in place for VCFs registered with SEBI, to those VCFs which are regulated by IFSCA. It is therefore, proposed to amend the definition of VCF in the Explanation to clause (23FB) of section 10, to include VCFs in IFSC.
(D) Section 94B of the Act puts in place a restriction on deduction of interest expense in respect of any debt issued by a non-resident, being an associated enterprise of the borrower. It applies to an Indian company, or a permanent establishment of a foreign company in India, who is a borrower. If such person incurs any expenditure by way of interest or of similar nature exceeding one crore rupees which is deductible in computing income chargeable under the head “Profits and gains of business or profession“, the interest deductible shall be restricted to the extent of thirty per cent. of its earnings before interest, taxes, depreciation and amortisation so as to avoid thin capitalisation of a corporate entity. At present, the provisions of this section do not apply to Indian companies or permanent establishments of foreign companies which are engaged in the business of banking or insurance or such class of non-banking financial companies as may be notified by the Central Government. It is now proposed that the provisions of this section shall not apply to finance companies, located in IFSC, as defined in clause (e) of sub-regulation (1) of regulation 2 of the IFSCA (Finance Company) Regulations, 2021 made under the IFSCA Act, 2019, which satisfy such conditions and carry on such activities as may be prescribed.
3. These amendments will take effect from the 1st day of April, 2025 and will, accordingly, apply in relation to the assessment year 2025-26 and subsequent assessment years.
Proposed Amendment of section 94B of Income Tax Act, 1961 vide Finance Bill, 2024
In section 94B of the Income-tax Act, with effect from the 1st day of April, 2025,––
(a) in sub-section (3), after the words “banking or insurance”, the words “or a Finance Company located in any International Financial Services Centre,” shall be inserted;
(b) in sub-section (5), after clause (iii), the following clauses shall be inserted, namely:––
‘(iv) “Finance Company” means a finance company as defined in clause (e) of sub-regulation (1) of regulation 2 of the International Financial Services Centres Authority (Finance Company) Regulations, 2021 made under the International Financial Services Centres Authority Act, 2019 and which satisfies such conditions and carries on such activities, as may be prescribed;
(v) “International Financial Services Centre” shall have the meaning as assigned to it in clause (q) of section 2 of the Special Economic Zones Act, 2005.’.
Extract of Clause 4 of Finance Bill 2024
Clause 4of the Bill seeks to amend section 10 of the Income-tax Act relating to incomes not included in total income.
Clause (4D) of the section 10, inter alia, provides that any income accrued or arisen to, or received by a specified fund, shall not be included in computing the total income of a previous year subject to the conditions mentioned therein.
It is proposed to insert a new sub-item in item (I) of sub-clause (i) of clause (c) of the Explanation to said clause (4D) to expand the scope of specified fund so as to include a fund established or incorporated in India in the form of a trust or a company or a limited liability partnership or a body corporate, which has been granted a certificate as a retail scheme or an Exchange Traded Fund and is regulated under the International Financial Services Centres Authority (Fund Management) Regulations, 2022, made under the International Financial Services Centres Authority Act, 2019 and satisfies such conditions as may be provided by rules.
Clause (23EE) of the section 10 provides exemption to the specified income of Core Settlement Guarantee Fund, set up by a recognised clearing corporation in accordance with the regulations.
Clause (i) of the Explanation to the said clause defines the expression “recognised clearing corporation” and clause (ii) thereof defines the expression “regulations”.
It is also proposed to amend clause (i) of the said Explanation to expand the definition of the expression “recognised clearing corporation” by including the recognised clearing corporation as defined in clause (n) of sub-regulation (1) of regulation 2 of the International Financial Services Centres Authority (Market Infrastructure Institutions) Regulations, 2021 made under the International Financial Services Centres Authority Act, 2019 also within its scope.
It is also proposed to amend clause (ii) of the said Explanation to expand the definition of the term “regulations” by including the International Financial Services Centres Authority (Market Infrastructure Institutions) Regulations, 2021 made under the International Financial Services Centres Authority Act, 2019 also within its scope.
Clause (23FB) of the section 10, inter alia, provides that any income of a venture capital company or venture capital fund from investment in a venture capital undertaking, shall not be included in computing the total income of a previous year.
It is also proposed to amend item (II) of sub-clause (A) of clause (b) of the Explanation to the said clause (23FB) to expand the scope of venture capital fund to include the venture capital fund referred to in sub-regulation (2) of regulation 18 of the International Financial Services Centres Authority (Fund Management) Regulations, 2022 made under the International Financial Services Centres Authority Act, 2019.
It is also proposed to insert sub-item (iv) in the said item (II) to provide for any other condition as may be provided by rules.
These amendments will take effect from 1st April, 2025 and will, accordingly, apply in relation to the assessment year 2025-2026 and subsequent years.
Extract of Clause 28 of Finance Bill 2024
Clause 28of the Bill seeks to amend section 94B of the Income-tax Act relating to limitation on interest deduction in certain cases.
Sub-section (3) of the said section provides that nothing contained in sub-section (1) shall apply to an Indian company or a permanent establishment of a foreign company which is engaged in the business of banking or insurance or such class of non-banking financial companies as may be notified by the Central Government in the Official Gazette in this behalf.
It is proposed to amend the said sub-section so as to include reference of a Finance Company located in any International Financial Services Centre.
It is further proposed to amend sub-section (5) of the said section to provide the meaning of expressions “Finance Company” and “International Financial Services Centre”
These amendments will take effect from 1st April, 2025 and will, accordingly, apply in relation to the assessment year 2025-2026 and subsequent years.
