TaxTMI 
TaxTMI 
Legal and Practical Implications for TDS on Offshore Fund Investments : Clause 393(2) [Table: S.No. 11 & 12] of Income Tax Bill, 2025 Vs. Section 196B of Income-tax Act, 1961
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....cations. It then undertakes a comparative analysis with the existing Section 196B of the Income-tax Act, 1961, highlighting similarities, differences, interpretative issues, and the broader policy context. Objective and Purpose The primary objective of Clause 393(2) [Table: S.No. 11 & 12] is to ensure efficient collection of tax at source on income earned by offshore funds from Indian units, as well as on long-term capital gains arising from the transfer of such units. The rationale is twofold: * To secure tax revenue from cross-border investment flows, particularly where the payee is a non-resident and the risk of non-compliance or non-reporting is higher. * To provide certainty and clarity to both payers and offshore funds regarding the applicable TDS rates, timing, and procedures, thereby reducing disputes and facilitating ease of doing business. Historically, Section 196B, read with Section 115AB of the 1961 Act, was introduced to attract foreign investment into Indian capital markets by offshore funds, while ensuring that the tax on such income is collected at the source. The 2025 Bill continues this policy, but with certain updates to reflect evolving market practices,....
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....imit The table does not specify any monetary threshold for TDS applicability. Thus, tax is to be deducted irrespective of the quantum of payment, which is consistent with the policy of minimizing revenue leakage in cross-border transactions. 6. Interaction with Other Provisions The deduction is "subject to the provisions of sub-sections (4), (8) and (9)," which deal with exceptions, declarations for non-deduction, and specific exclusions (such as payments to government, RBI, etc.). The Bill also provides for crediting to suspense accounts being deemed as payment to the payee, closing loopholes for deferral. Ambiguities and Potential Issues * Definition of "units" and "offshore fund": The interpretation will hinge on the cross-reference to section 208, which must be carefully drafted to avoid disputes about eligibility. * Interaction with Tax Treaties: The Bill is silent on whether the offshore fund can claim lower rates under a Double Taxation Avoidance Agreement (DTAA). However, as per general principles and Section 90 of the 1961 Act (likely to be retained in the new Bill), the beneficial provisions of tax treaties should prevail. * Grossing up: If the agreement provide....
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.... to in section 115AB, which takes place on or after the 23rd day of July, 2024. 2. Similarities * Scope of Income: Both the old and new provisions cover income from units and long-term capital gains from the transfer of such units by offshore funds. * Payee and Payer: In both, the payee is an offshore fund, and the payer is any person responsible for making the payment. * Timing of Deduction: TDS must be deducted at the time of credit or payment, whichever is earlier. * Rates: The rates are harmonized, with 10% for income from units and 12.5% for long-term capital gains arising from transfers post-23 July 2024. 3. Differences and Nuances * Reference to Underlying Provisions: Section 196B refers explicitly to units u/s 115AB, whereas Clause 393(2) refers to units u/s 208 of the new Bill. The substance is likely the same, but the cross-reference reflects the renumbering and restructuring in the new Bill. * Explicit Segregation in Table: The Bill splits the income into two distinct entries (S.No. 11 and 12), making the distinction between "income from units" and "long-term capital gains" more explicit. * Clarity in Rate Change: Section 196B details the rate change date....
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....S rate hike on long-term capital gains may be seen as a negative by some foreign investors, the overall clarity and continuity of the regime should preserve India's competitive position. - Advisors and market participants must update systems and processes to ensure compliance with the new rates and definitions 5. Comparative Table Aspect Section 196B of the Income-tax Act, 1961 Clause 393(2) [Table: S.No. 11 & 12] of the Income Tax Bill, 2025 Capital Gains TDS Rate 10% (for transfers before 23 July 2024); 12.5% (for transfers on/after 23 July 2024, as per 2024 amendment) 12.5% (for all transfers; no reference to date) Reference to Underlying Units Units referred to in Section 115AB (units of mutual funds purchased in foreign currency, specified companies, etc.) Units referred to in Section 208 (presumably similar, but needs confirmation; could be broader or narrower) Statutory Language Separate treatment for income from units and capital gains, with explicit reference to date of transfer for rate change Separate S.No. for each, but applies the new 12.5% rate for capital gains without date bifurcation Legislative Intent Initially designed to p....