Budget 2024: Tax Incentives to IFSC to Promote Investment and Employment

The Union Budget 2024 was presented on 23rd July in the Parliament by Finance Minister Nirmala Sitharaman. The Finance Minister has approved many proposed changes in the area of GST and Income Tax and some other changes.

Let’s discuss one of the changes here in this article, which is provided as a measure to promote investment and employment.

Tax Incentives to International Financial Services Centre

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. Several tax benefits have been granted to IFSC units under the Act in recent years to encourage the establishment of world-class financial infrastructure in India.

In order to further incentivize operations from IFSC, it is proposed to make the following amendments:

• Item (I) of sub-clause (i) of clause (c) of the Explanation to clause (4D) of Section 10 would be revised to broaden the scope of designated funds eligible for 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.
• The definition of “recognised clearing corporation” and “regulations” in the Explanation to clause (23EE) of section 10 of the Act is proposed to be amended to exempt certain income from Core Settlement Guarantee Funds established by recognised clearing corporations in IFSC. The definition of “recognised clearing corporation” will now include recognised clearing corporations as specified in clause (n) of sub-regulation (1) of regulation 2 of the IFSCA (Market Infrastructure Institutions) Regulations, 2021, enacted under the IFSCA Act, 2019. The IFSCA (Market Infrastructure Institutions) Regulations, 2021 will now be included in the meaning of “regulations”.
• Section 68 of the Act states that if any sum is discovered to be credited in the books of an assessee maintained for any previous year and the assessee provides no explanation about the nature and source of the sum, or if the explanation provided by him is not satisfactory in the opinion of the Assessing Officer, the sum so credited may be charged to income-tax as the assessee’s income for 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 the 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.

• Section 94B of the Act restricts the deduction of interest expenses for any debt issued by a non-resident who is an associated enterprise of the borrower. It applies to any Indian corporation or a permanent establishment of a foreign company in India that is a borrower. If such person incurs any expenditure by way of interest or of a 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 30% of its earnings before interest, taxes, depreciation and amortisation so as to avoid thin capitalisation of a corporate entity. Currently, the provisions of this section do not apply to Indian corporations or permanent establishments of foreign companies engaged in banking or insurance, or to such non-banking financial companies as the Central Government may notify. It is now proposed that the provisions of this section do not apply to finance companies located in IFSCs, 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, that meet the conditions and engage in the activities prescribed.

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.