Union Budget 2024-25 (Full) + FINANCE (No.2) Bill, 2024

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.

[Clauses 4 & 28]

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Full Text:

Union Budget 2024-25 (Full) + FINANCE (No.2) Bill, 2024

Tax incentives for IFSC expanded: wider fund exemptions, clearing house income relief, VC relief, and interest limit carve outs. Proposed amendments broaden IFSC tax concessions: include retail schemes and Exchange Traded Funds as specified funds under section 10(4D); exempt specified income of Core Settlement Guarantee Funds by recognising IFSCA market infrastructure regulations; extend section 68 relief to Venture Capital Funds regulated by IFSCA; and exclude IFSC finance companies from the section 94B interest deduction limitation, subject to prescribed conditions. Amendments take effect from 1 April 2025 and apply to the subsequent assessment year.