Clause 193 Tax on income from Global Depository Receipts purchased in foreign currency or capital gains arising from their transfer.

Income Tax Bill, 2025

Introduction

Clause 193 of the Income Tax Bill, 2025, represents a significant legislative provision that addresses the taxation regime applicable to income derived from Global Depository Receipts (GDRs) purchased in foreign currency, and capital gains arising from their transfer, by resident employees of Indian companies or their subsidiaries engaged in specified knowledge-based industries or services. This provision is a successor and, in many respects, a restatement with modifications of the existing Section 115ACA of the Income Tax Act, 1961. To understand the full import of Clause 193, it is essential to examine its objectives, structure, and implications, and to compare these with the extant Section 115ACA and the relevant notifications-namely, Notification No. S.O.1120(E) dated 12-11-2001 and Notification No. 11293 dated 28-03-2000 which specify the eligible schemes under the provision. The significance of Clause 193 lies in its targeted application to a select group of taxpayers-resident employees of Indian companies or their subsidiaries in specified sectors-who are incentivized through concessional tax treatment on income from GDRs acquired under notified Employee Stock Option Schemes (ESOPs). The provision is situated within the broader policy context of encouraging foreign investment, employee participation in equity, and the development of knowledge-based sectors in India.

Objective and Purpose

The legislative intent behind both Clause 193 and its predecessor, Section 115ACA, is to facilitate and incentivize the participation of employees in the equity of their employers, particularly in globally competitive, knowledge-driven industries. By providing concessional tax rates on dividends and capital gains arising from GDRs purchased in foreign currency, the law seeks to:

• Encourage Indian companies to offer ESOPs involving GDRs as part of their employee compensation and retention strategies;
• Enhance the competitiveness of Indian companies and their subsidiaries in attracting and retaining skilled talent;
• Channel foreign currency inflows into the Indian corporate sector through the mechanism of GDRs;
• Align the Indian tax regime with international best practices for employee stock incentives and cross-border securities offerings.

The notifications u/s 115ACA further operationalize this intent by specifying the eligible schemes-namely, "the Issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through Depository Receipt Mechanism) Scheme, 1993"-thereby ensuring that only bona fide ESOPs structured under government-approved frameworks benefit from the concessional regime.

Detailed Analysis Clause 193 of the Income Tax Bill, 2025

1. Scope and Applicability

Clause 193 (IT Bill, 2025):

- Applies to a resident individual who is an employee of an Indian company (or its subsidiary, including those incorporated outside India) engaged in a "specified knowledge based industry or service."

- Covers income from (i) dividends on GDRs issued under a notified ESOP and purchased in foreign currency; and (ii) long-term capital gains from the transfer of such GDRs.

Section 115ACA (IT Act, 1961):

- The scope and target beneficiaries are identical: resident employees of Indian companies or their subsidiaries in specified knowledge-based sectors, holding GDRs acquired under a government-notified ESOP.

Notifications (S.O.1120(E) and 11293):

- Both notifications specify the "Issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through Depository Receipt Mechanism) Scheme, 1993" as the eligible scheme for the purposes of Section 115ACA, and by extension, Clause 193.

Comparative Note:

- Both the old and new provisions maintain a narrow, targeted scope, ensuring that the concessional regime is available only to employees in sectors identified as critical for India's knowledge economy and only in respect of GDRs acquired under prescribed schemes.

2. Income Streams and Tax Rates

Clause 193:

- Dividends on GDRs: Taxed at a flat rate of 10%.

- Long-term capital gains on transfer of GDRs: Taxed at a flat rate of 12.5%.

- Other income: Taxed as per normal rates after excluding the above incomes.

Section 115ACA:

- Dividends on GDRs: Taxed at 10%.

- Long-term capital gains: - Prior to 23rd July 2024: 10% rate. - On or after 23rd July 2024: 12.5% rate (amended by Finance (No. 2) Act, 2024).

- Other income: Taxed as per normal rates, after exclusion.

Comparative Note:

- The primary difference is the uniform application of the 12.5% rate for long-term capital gains in Clause 193, whereas Section 115ACA provides a transition: 10% for transfers before 23rd July 2024, and 12.5% thereafter.

- The dividend rate remains unchanged at 10% in both provisions.

- The structure-separating the concessional incomes from other income for tax computation-remains constant.

3. Deductions and Computation Mechanism

Clause 193:

- If the gross total income consists solely of GDR dividends, no other deductions are allowed.

- If the gross total income includes GDR dividends or GDR capital gains, the gross total income is reduced by such amounts for the purposes of computing deductions under other provisions.

Section 115ACA:

- Contains identical provisions regarding the denial of deductions where the gross total income consists only of GDR dividends, and the reduction mechanism where such income is included alongside other income.

Comparative Note:

- Both provisions aim to prevent double benefits-i.e., concessional tax rates and deductions-on the same income.

- The mechanism ensures that the tax incentive is limited to the specified income streams, and the normal deduction regime applies only to the balance income.

4. Computation of Capital Gains

Clause 193:

- Explicitly provides that Section 72(6) (presumably dealing with set-off of losses) shall not apply for computation of long-term capital gains from GDRs.

Section 115ACA:

- States that the first and second provisos to Section 48 (which deal with indexation and computation of capital gains in foreign currency) do not apply to GDR capital gains.

Comparative Note

- The approach to capital gains computation is slightly different in drafting. Clause 193 refers to Section 72(6) (which, in the context of the 2025 Bill, may have replaced the role of Section 48 provisos or may relate to a new computation rule), whereas Section 115ACA specifically excludes indexation and foreign currency computation benefits for GDRs.

- The underlying intent is to prevent additional tax benefits (such as indexation or currency fluctuation adjustments) on top of the concessional rate.

5. Definitions and Key Terms

Both provisions provide detailed definitions for the following terms:

• Global Depository Receipts (GDRs): Instruments created by an Overseas Depository Bank outside India or in an International Financial Services Centre (IFSC), issued against ordinary shares or foreign currency convertible bonds. The definition has been updated over time to include GDRs issued against shares of companies incorporated outside India, provided they are listed and traded in an IFSC.
• Specified knowledge-based industry or service: Includes information technology software, information technology service, entertainment service, pharmaceutical industry, biotechnology industry, and any other industry or service as notified by the Central Government.
• Subsidiary: Defined as per the Companies Act, 2013 (Clause 193) or Companies Act, 1956 (Section 115ACA), including subsidiaries incorporated outside India.
• Information technology service/software, Overseas Depository Bank: Definitions remain consistent across both provisions.

Comparative Note: - The definitions have evolved to keep pace with changes in corporate law (shift from Companies Act, 1956 to 2013) and to accommodate international developments, such as the emergence of IFSCs. - The scope of eligible GDRs has been broadened over time, reflecting the globalization of Indian corporate structures and capital markets.

6. Notifications and Their Role

Notification No. S.O.1120(E)  dated 12-11-2001) and Notification No. 11293 dated 28-03-2000

- Both notifications specify the "Issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through Depository Receipt Mechanism) Scheme, 1993" as the eligible scheme for the purposes of Section 115ACA.

- These notifications are critical in operationalizing the concessional regime, as only GDRs issued under such notified schemes are eligible.

Comparative Note:

- The requirement for notification ensures regulatory oversight and restricts the benefit to government-approved ESOPs, preventing misuse.

- Clause 193 continues the notification requirement, reaffirming the central government's role in designating eligible schemes.

Practical Implications

1. For Employees

- Employees in targeted sectors who acquire GDRs under notified ESOPs benefit from a lower tax rate on dividends (10%) and long-term capital gains (12.5%).

- The denial of deductions on such income simplifies compliance and prevents tax arbitrage.

- The structure incentivizes employees to participate in global equity offerings, enhancing their alignment with corporate performance and global competitiveness.

2. For Employers (Indian Companies and Subsidiaries)

- The ability to offer GDR-based ESOPs with concessional tax treatment is a valuable tool for talent acquisition and retention, especially in globally competitive industries.

- The provision encourages Indian companies to access international capital markets and to structure employee compensation in line with global best practices.

3. For Regulators and Policymakers

- The notification mechanism provides regulatory control, ensuring only genuine, government-approved schemes benefit.

- The provision aligns with policy goals of attracting foreign investment, deepening capital markets, and supporting the knowledge economy.

4. For Tax Administration

- The clear definition of eligible income and denial of deductions reduces ambiguity and potential for litigation.

- The exclusion of indexation or currency adjustment benefits (or set-off, as per the new clause) simplifies tax computation and reduces administrative burden.

Comparative Analysis: Clause 193 vs. Section 115ACA

Ambiguities and Potential Issues

• Transition in Capital Gains Computation: The shift from exclusion of Section 48 provisos to exclusion of Section 72(6) may indicate a change in the computation mechanism for capital gains; this requires clarification in the context of the new Income Tax Bill's structure.
• Definition of "Specified Knowledge-Based Industry or Service": While the core sectors are listed, the phrase "any other industry or service as specified by the Central Government" leaves room for further expansion, necessitating timely notifications for clarity.
• Notification Dependency: The benefit is contingent on timely government notification of eligible ESOP schemes; delays or ambiguities in notification may affect taxpayer certainty.
• Consistency in Definitions: The update to Companies Act, 2013 is appropriate, but cross-references in subsidiary definitions and IFSCs should be harmonized for consistency across tax and company law frameworks.

Conclusion

Clause 193 of the Income Tax Bill, 2025, is a direct continuation and modernization of the concessional tax regime for income from GDRs acquired by resident employees of Indian companies or their subsidiaries in specified knowledge-based sectors. The provision preserves the core structure and intent of Section 115ACA, while updating certain aspects-such as the applicable capital gains tax rate and statutory cross-references-to reflect current legal and economic realities. The associated notifications remain integral, ensuring that only government-approved ESOPs benefit from the regime. The comparative analysis reveals a high degree of continuity, with changes primarily reflecting the evolution of the corporate and tax regulatory landscape. The provision continues to serve as a targeted tool for incentivizing employee participation in global equity offerings, supporting the growth of knowledge-driven industries, and aligning India's tax policy with international practices.

Full Text:

Clause 193 Tax on income from Global Depository Receipts purchased in foreign currency or capital gains arising from their transfer.