April 16, 2024

Tax implications on units established in GIFT City-India’s First International Finance Service Centre (IFSC)

GIFT City is a acronym for “Gujarat International Finance Tech-City”. GIFT City is a central business district established in Ahmedabad District in Gujarat, India. This is a government promoted greenfield project inaugurated in 2015. GIFT City is the India’s first Operational smart city.

As the name depicts, GIFT City is intended to make a global hub in India to provide financial and business services and attract the business and investors around the world. GIFT City is intended to create a Tech City in India. The services industries established in Gift City are Offshore banking, asset management, insurances, capital market etc. Units established in GIFT City intends to offer global financial and IT Services.

A area of gift city is a notified Special Economic Zone (SEZ) and remaining part is considered as Domestic Tarriff area (DTA). So far, many companies have already established there unit in GIFT City.

To promote entities in GIFT City, the government of India has provided various tax incentives to units located in GIFT City. This article discusses the tax incentives available to units located in GIFT city.

1. Tax incentives under Income Tax Act

1.1 For Units located in IFSC

Following incentives are available to the units located in IFSC Units:

a. Tax Holidays for consecutive period of 10 Years

As per Section 80LA(1A) of Income Tax Act, Units of an International Financial Services Centre (IFSC) shall be allowed a deduction of 100% of total income for any 10 consecutive assessment years, at the option of the assessee, out of 15 years.
Computation of such 15 years shall commence from the assessment year relevant to the previous year in which the registration under the International Financial Services Centres Authority Act, 2019 (50 of 2019) was obtained.
Further, Such deduction shall be allowed with respect to income arises from any Unit of the International Financial Services Centre from its business for which it has been approved for setting up in such a Centre in a Special Economic Zone.

b. MAT/AMT applicable at the rate 9%

As per Section 115JB of Income Tax Act, every company is liable to pay Minimum alternate tax of 18.5% of its book profit.
However, as per Section 115JB(7) of Income Tax Act, where the assessee is a unit located in International Financial Services Centre and drives its income solely in convertible foreign exchange then such unit shall be liable to pay MAT at the rate of 9% instead of 18.5%.
Further, provisions of MAT and AMT shall not apply to companies and units located in IFSC which has opted for new tax regime.

c. Taxability of Dividend Income in hands of Shareholders

Till 31st March, 2020, as per Section 115-O of Income Tax Act, any amount declared, distributed or paid by any company in form dividend (whether interim or otherwise) on or after 01.04.2003 till 31.03.2020 then such distributed dividend shall be charged to additional income-tax (DDT) at the rate of 15% in the hands of company.
As per Section 115-O(8) of Income tax act, where dividend income is distributed by any unit located in International Financial Service Centre (IFSC) on or after 1st April, 2017 then such dividend income shall neither be taxable in hand of the company nor the person racing such dividend;
However, provisions of Section 115-O has become ineffective from 1st April, 2020 onwards and dividend income is taxable in hands of the shareholders.
For Units located in IFSC also, the dividend income is taxable in hands of the shareholders with effect from 01.04.2020.

d. Non applicability of Surcharge and cess on certain incomes

surcharge and health and education cess not applicable on certain incomes earned by specified funds in the IFSC.

1.2 Tax incentives to Investors

a. Income tax on dividend income received from NRI or foreign Company

As per Section 115A of Income Tax Act, where total income of a non-resident or a foreign company includes any income by way of dividend received from units located in IFSC then such dividend income shall be liable to Income tax @ 10%.

b. No capital gain on transfer of specified securities listed on IFSC Exchange

Section 47 of Income Tax Act, 1961, list down the nature of transactions which are not considered as transfer and therefore, provisions of capital gain shall not apply on the same.
As per Section 47(viiiab) of Income Tax Act, any transfer of a capital asset, being
- bond or Global Depository Receipt referred to in sub-section (1) of section 115AC; or
- rupee denominated bond of an Indian company; or
- derivative; or
- such other securities as may be notified by the Central Government in this behalf,

made by a non-resident on a recognised stock exchange located in any IFSC and where the consideration for such transaction is paid or payable in foreign currency shall not be considered as transfer.

Accordingly, no transfer gain shall be applicable on such transfer.

c. Non-taxability of Interest and Royalty Income in hands of Non-resident

As per Section 10(4F) of Income Tax Act, any income earned by non-resident in form of royalty or interest from a unit of an International Financial Services Centre (as referred to in Section 80LA(1A)) shall not be liable to income tax.
Provided that such unit should have commenced its operations on or before the 31st day of March, 45.

d. Other exemptions

Interest on Long Term Bonds and Rupee Denominated Bonds listed only on a recognised stock exchange in IFSC:
Income received by a non-resident from a portfolio of securities or financial products or funds, managed or administered by any portfolio manager on behalf of such non-resident, in an account maintained with an Offshore Banking Unit of an IFSC, to the extent such income accrues or arises outside India is exempt from tax and is not deemed to accrue or arise in India.

2. Tax Incentive under Goods and Service Tax

Under Good and Service Tax law, no GST is applicable on services supplied to units located in IFSC. However, services supplied by IFSC to the units or companies located in Domestic Tariff Area (DTA) is liable to GST.

Further, from the investors perspectives, No GST is applicable on transactions carried out in IFSC exchanges.

3. Other Incentives

For units located in IFSC, subsidies are available for various expenses such as Lease Rental, PF Contribution, electricity charges. For investors, exemption is available from Security Transaction tax, CTT, Stamp Duty in respect of transactions carried out on IFSC Exchange.

DISCLAIMER: The views expressed are strictly of the author and VJM & Associates LLP. The contents of this article are solely for informational purpose. It does not constitute professional advice or recommendation of firm. Neither the author nor firm and its affiliates accepts any liabilities for any loss or damage of any kind arising out of any information in this article nor for any actions taken in reliance thereon.

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