Evolution of Special Tax Regimes for Offshore Funds : Clause 208 of the Income Tax Bill, 2025 Vs. Section 115AB of the Income-tax Act, 1961

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....hese provisions lies in their impact on cross-border investments, the mutual fund industry, and India's image as an investment destination. By offering certainty and concessional tax rates, both Clause 208 and Section 115AB aim to foster the inflow of foreign capital, which is crucial for the development of domestic financial markets. At the same time, these provisions are tailored to prevent tax arbitrage and ensure that only qualifying entities benefit from the special regime. This commentary provides a detailed, itemized analysis of Clause 208, explores its legislative intent, practical implications, and addresses interpretational issues. It then undertakes a comprehensive comparative analysis with Section 115AB, highlighting both continuity and change, and concludes with observations on the likely impact and potential areas for further reform. Objective and Purpose The core objective of Clause 208, echoing that of Section 115AB, is to provide a special tax regime for overseas financial organizations (offshore funds) investing in units of mutual funds or the Unit Trust of India (UTI) using foreign currency. The legislative intent is twofold: * Attracting Foreign Investme....

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....le to the entity, ensuring that the concessional regime is ring-fenced to specified income streams. * Aggregation: The provision requires aggregation of tax computed under each head for total tax liability, ensuring clarity and preventing double taxation. 2. Deductions and Computation of Gross Total Income This clause 208(2) addresses the allowability of deductions and the computation of gross total income in two scenarios: * Exclusive Income from Units or LTCG: Where the gross total income consists only of income from units or LTCG from their transfer, no deduction is allowed u/ss 26 to 61, section 93(1)(a) and (e), or under Chapter VIII. * Mixed Income: Where the gross total income includes such income (from units or LTCG) along with other income: * The gross total income is to be reduced by the amount of such income (from units or LTCG); and * Deductions under Chapter VIII are allowed as if the reduced gross total income were the gross total income of the assessee. Interpretation and Implications: * Ring-fencing of Concessional Income: The provision ensures that income eligible for concessional tax rates does not enjoy further deductions, thus preventing double be....

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....Administration: The clear segregation of income streams and denial of double deductions simplifies tax assessment but requires careful scrutiny of documentation and fund structures. * Market Impact: By offering a competitive, stable tax regime, the provision may enhance India's standing in global capital markets, though changes in rates (such as the increase in LTCG tax) may affect investment decisions. Comparative Analysis: Clause 208 vs. Section 115AB 1. Scope and Structure Both provisions apply to "overseas financial organisations" investing in units purchased in foreign currency, and both prescribe special tax rates for income from such units and capital gains from their transfer. However, Clause 208 streamlines the structure and updates references to align with contemporary legislation (e.g., Companies Act, 2013, instead of 1956). The definitions are consolidated and clarified, enhancing interpretive certainty. 2. Tax Rates - Section 115AB: Originally provided a 10% rate for both income from units and long-term capital gains. The Finance (No. 2) Act, 2024, amended the rate for long-term capital gains to 12.5% for transfers on or after July 23, 2024. - Clause 208: D....

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....nit": The cross-references to Schedule VII in Clause 208 versus Section 10(23D) in Section 115AB may affect the scope of eligible investments, depending on how mutual funds are listed or defined in the respective schedules/sections. Comparative Table: Key Provisions Aspect Section 115AB of the Income-tax Act, 1961 Clause 208 of the Income Tax Bill, 2025 Eligible Assessee Overseas financial organisation (Offshore Fund) Overseas financial organisation (Offshore Fund) Eligible Income Income from units & long-term capital gains Income from units & long-term capital gains Tax Rate: Income from units 10% 10% Tax Rate: Long-term capital gains 10% (prior to 23 July 2024); 12.5% (after) 12.5% Deductions No deduction under Secs 28-44C, Section 57(i)/(iii), Chapter VI-A; no indexation No deduction under Secs 26-61, Section 93(1)(a)/(e), Chapter VIII Approval Requirement Arrangement approved by SEBI Arrangement approved by SEBI Definition of "Unit" Mutual fund under Section 10(23D) or UTI Mutual fund in Schedule VII or UTI Reference to Companies Act Companies Act, 1956 Companies Act, 2013 Ambiguities and Issues in Interpretation While bo....