 "sitharaman budget 2024")
Finance Minister Nirmala Sitharaman has granted an additional year for certain businesses to establish units at the International Financial Services Centre (IFSC) to avail of tax exemptions.
The tax holiday for various businesses at the IFSC is without any sunset clause. However, some, such as aircraft and ship leasing companies, were required to commence operations before March 31, to benefit from tax advantages.
In the Interim Budget, Sitharaman proposed extending this deadline to March 31, 2025. She also stated that the unified regulator Intern-ational Financial Services Centres Authority (Ifsca) “is creating a robust gateway for global capital and financial services for the economy”.
Tax experts suggest that this one-year extension will encourage registrations at the Gujarat International Finance Tec-City (GIFT City) IFSC.
“This extension (for perpetual tax exemption) is expected to boost new as well as existing IFSC banks based in GIFT City to fast-track the establishment and launch of investment divisions. Similarly, to propel the establishment of aircraft and ship leasing companies, the deadline for these companies to set up operations and claim withholding tax exemption on interest and royalty payments to non-residents has been extended to March 31, 2025,” said Jaiman Patel, partner, international tax, EY India.
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As of September 30, 2023, there were 15 registered units for aircraft leasing and four ship leasing units, according to IFSCA data. Between July and September 2023, IFSCA received four applications for the registration of aircraft leasing units and three for ship leasing. According to the National Securities Depository website, there are a total of 35 foreign portfolio investors (FPIs) registered in GIFT IFSC.
“Currently, the tax holiday for various businesses in IFSC, in general, is open-ended, i.e., without any sunset clause. However, concerning investment division offshore banking units registered as FPIs and aircraft leasing businesses, the requirement of setting up a business by March 31, 2024, is now extended to 2025 by the Finance Bill. This should provide some breathing room for these businesses to set up operations in GIFT City," said Sunil Gidwani, partner at Nangia Andersen.
At present, several financial services firms at the maiden IFSC enjoy a 10-year tax holiday. This means that services such as banking, fund management, brokers, insurance, and financial technology qualify for a 100 per cent exemption in direct taxes for 10 consecutive years.
Legal experts mention that there is no requirement to start a business by a certain date for this tax holiday. However, the benefit is not available for all businesses. The extension of the deadline will also benefit non-resident investors.
“For certain types of transactions in IFSC, businesses must commence operations by March 31, 2024. Firstly, the sale of an aircraft or a ship by a leasing company may result in gains for such a company. Further, non-resident investors in such a company may earn interest or royalty from such a company. Secondly, the investment division of offshore banks registered as FPIs issuing participatory notes to non-resident investors may earn capital gains from transactions in Indian securities,” added Gidwani.
“The decision to extend tax exemptions on specific IFSC unit income reflects a forward-looking approach. We appreciate the government’s continued support, emphasising GIFT IFSC’s pivotal role in the global financial landscape,” said Tapan Ray, managing director and group chief executive officer, GIFT City.
Among other tax benefits in GIFT City, dividends received by non-residents from an IFSC unit are taxable at a concessional rate. Interest income on money lent to IFSC units is not taxed. Furthermore, surcharge and health and education cess do not apply to certain incomes earned by specified funds in the IFSC.
