Direct Tax Alert

Background

Recently, the Central Board of Taxes (CBDT) has issued a notification¹ exempting Tax Deducted at Source (TDS) compliances for specified payments made to certain International Financial Services Centre (IFSC) units under section 197A(1F)² read with section 80LA³ of the Income-tax Act, 1961 (IT Act).  This notification is effective from 1 April 2024.
We, at BDO in India, have summarised the above notification and have provided our comments on the impact of this notification hereunder.

Exemption from TDS on specified payments

As per the aforesaid notification, no tax will be required to be deducted at source while making specified payments to the specified units in IFSC, which are eligible and have claimed the benefit under section 80LA of the Act. The list of specified units along with specified payments which would not be subject to TDS are as under:

Sr. No.	IFSC Units (Payee)	Nature of receipt
1.	Banking Unit	Interest income on External Commercial Borrowings /Loans
		Professional fees
		Referral fees
		Brokerage income
		Commission income on factoring and forfaiting services
2.	IFSC Insurance Intermediary Office	Insurance commission
3.	Finance Company	Interest income on External Commercial Borrowings /Loans
		Dividend income
		Commission income on factoring and forfaiting services
4.	Finance Unit	Interest income on External Commercial Borrowings /Loans
		Dividend income
		Commission income on factoring and forfaiting services
5.	Fund Management Entity	Professional fee
6.	Broker-Dealer	Dividend
7.	Investment Advisor	Investment advisory fee
8.	Registered Distributor	Distribution fee and Commission fee
9.	Custodian	Professional fee
		Commission fee
10.	Credit rating agency	Credit rating fee
11.	Investment banker	Investment banker fee
12.	Debenture trustee	Trusteeship fee
13.	International Trade Finance Service or “ITFS”	Commission income
14.	FinTech Entity	Technical fee/Professional fee
		Commission income

Note: Please refer the CBDT notification to know the definition of the aforementioned IFSC units.

Conditions for availing the exemption

• IFSC Unit will be required to submit a statement-cum-declaration in Form No. 1 to the ‘payer’ providing details of ten consecutive fiscal years (FYs) for which deduction is being claimed under section 80LA(1A) and (2) of the IT Act.
• Such statement-cum-declaration shall be furnished and verified in the prescribed manner, for each FY for which the IFSC unit opts for claiming deduction under section 80LA(1A) and (2) of the IT Act.
• The ‘payer’ shall not deduct tax at source on payment made to the IFSC unit, after the date of receipt of the copy of the above statement-cum-declaration i.e. Form 1 from Payee.
• Further, the ‘payer’ shall furnish the particulars of all the payments on which tax was not deducted, in their TDS return.

Validity of the above Exemption

• The above relaxation would be available to the IFSC units only during the ten consecutive FYs for which tax holiday would be claimed and the same has been declared in Form No. 1 by the IFSC Unit.

 

BDO in India Comments:

The Government in recent times has been consistently addressing the needs for ease of business, mitigating compliance burdens and promoting IFSC as a preferred destination for offshore investors. This notification seems to be a welcome relief for the units located in IFSC. The notification has exhaustively enlarged the scope of payments covered within the exemption list with respect to the withholding of taxes on payments to specified IFSC units. The long pending demand for making the statutes for tax withholding synchronised with that of the tax exemptions claimed by units in IFSC is now adhered to.

This will in turn streamline the financial transactions and address the issue of cash flow blockages due to tax withholding thereby building operational efficiencies and optimising financial benefits.