| Key Amendments to Finance Bill, 2023 |
Finance Bill, 2023 was presented by the Hon'ble Finance Minister (FM), Nirmala Sitharaman on 1 February 2023. While moving the Bill for approval by the Lok Sabha on 24 March 2023, the FM introduced amendments to Finance Bill 2023. The said 'Amended Bill' has been passed by the Lok Sabha on 24 March 2023. The Bill is still awaiting assent from the President. The key amendments to the Finance Bill, 2023 are captured below:
| Increase in the Tax Rate on Royalties/Fees for Technical Services |
Non-residents/foreign companies earning Royalties/Fees for Technical Services (FTS) from India are currently taxed at 10% under the Income-tax Act, 1961 (ITA). The said rate is now proposed to increase to 20%.
This amendment will be effective from 1 April 2023.
| International Financial Service Center (IFSC) |
Several amendments have been proposed relating to a unit set up in an IFSC. These amendments are effective from 1 April 2023:
| Interest on Borrowings
Currently, the interest paid with respect to monies borrowed from a source outside India by way of issuance of long-term bonds or rupee-denominated bonds, which are listed on recognized stock exchanges located in an IFSC, is taxable at 4%. The same is now proposed to be taxed at an increased rate of 9% for any borrowings on or after 1 July 2023.
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| Dividend paid to Non-residents
Dividend paid to non-residents by a unit in an IFSC is proposed to be taxed at a concessional rate of 10% as against the earlier tax rate of 20%.
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| Non-applicability of Surcharge and Cess
Surcharge and Cess are not applicable on income from securities earned by a Specified Fund i.e. Category III Alternate Investment Funds and Investment Banking Divisions of an Offshore Banking Unit (OBU) in an IFSC. |
| Tax Exemption to Non-Residents maintaining an account with an Offshore Banking Unit (OBU) in IFSC
Income received by non-residents from a portfolio of securities or financial products or funds managed or administered by a portfolio manager on behalf of the non-resident in an account maintained with an OBU in an IFSC is proposed to be exempt to the extent the income accrues or arises outside India and is not deemed to accrue or arise in India.
A notification in this regard will be introduced by the Central Board of Direct Taxes (CBDT). |
| Aircraft Leasing
Capital Gains: The capital gain earned on the transfer of equity shares of a unit of an IFSC by a non-resident or a unit of an IFSC engaged in leasing aircrafts is now exempt from tax. The exemption is applicable to transfer of shares of a domestic company being a unit of an IFSC engaged primarily in leasing aircrafts that have commenced operations on or before 31 March 2026.
The exemption shall be available only when the shares of the domestic company are transferred within a period of 10 years beginning from the year of commencement of operations or from 1 April 2023 (in cases where the business has already commenced and the period of 10 years ends before 1 April 2033).
Dividend Income: Furthermore, dividend from a company located in an IFSC, which is engaged primarily in the business of leasing aircrafts, is proposed to be exempted from tax.
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| Tonnage Tax
Ship leasing companies in an IFSC are enabled to opt for the Tonnage Tax Scheme within three months from the end of the tax holiday period under Section 80LA of the ITA. |
| Tax exemption for Non-residents on the distribution of income from Offshore Derivative Instruments (ODI)
In order to remove double taxation on the distribution of income to ODI holders by an IFSC Banking Unit (IBU), the 'Original Finance Bill' proposed to provide an exemption to any income distributed on an ODI entered with an IBU, provided that the same is chargeable to tax in the hands of the IBU.
There were concerns raised related to the satisfaction of the condition of chargeability of income in the hands of the IBU and claiming exemption in the hands of non-resident ODI holders. To address this anomaly, t is now proposed to remove the said condition of chargeability of income in the hands of the IBU.
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| Relocation of an Offshore Fund to an IFSC
The ITA provides a tax-neutral relocation of Offshore Funds to an IFSC [i.e. assets of the Original Fund or of its wholly-owned Special Purpose Vehicle (SPV)], to a resultant fund in an IFSC].
The definition of an 'Original Fund' is proposed to be amended to cover investment vehicles of the Abu Dhabi Investment Authority, the Government of Abu Dhabi, and other funds (to be notified by the Central Government).
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| Extension of 100% Tax Holiday to OBUs
Presently, an OBU set up in a Special Economic Zone (SEZ) is eligible for 100% tax deduction for the first five consecutive assessment years and 50% tax deduction for the subsequent five years.
It is now proposed to provide a 100% tax deduction for the subsequent five years as against the 50% deduction provided earlier.
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| Scope of taxation of Capital Gains in the case of Market-linked Debentures expanded to Specified Mutual Funds |
- The 'Original Finance Bill' proposed that capital gains arising from the transfer or redemption or maturity of Market-linked Debentures be taxable as short-term capital gains at the applicable tax rates.
- Capital gains will be computed by reducing the cost of acquisition of the debenture and the expenditure incurred wholly or exclusively in connection with the transfer or redemption of such debenture from the sales consideration. Furthermore, no deduction is to be allowed for Securities Transaction Tax (STT).
- The 'Amended Finance Bill' now proposes to expand the scope to Specified Mutual Funds. A 'Specified Mutual Fund' means a mutual fund where not more than 35% of its total proceeds are invested in the equity shares of domestic companies. This provision will be applicable to Specified Mutual Funds acquired on or after 1 April 2023.
| Tax Avoidance through distribution by Business Trusts to its Unit Holders |
- The 'Original Finance Bill' proposed to tax the income distributed by business trusts [comprising Real Estate Investment Trust (REIT) and Infrastructure Investment Trust (InVIT) investing in SPVs] as repayment of debt in the hands of unit holders. The income will be derived after reducing the cost of the acquisition of such units.
- The 'Amended Finance Bill' now proposes a specified formula to determine the specified sum taxable in the hands of unit holders.
- The specified sum shall be determined equal to A-B-C, where A is cumulative distributions made to the unit holders other than specified distributions, B is the issue price (cost of acquisition), and C is the amount already taxed in any of the previous years.
| Tax Deduction at Source (TDS)/Tax Collection at Source (TCS) |
- Taxability on Winnings from Online Games: The 'Original Finance Bill' proposed to introduce a new section for taxability and withholding tax for online gaming. The said amendment was proposed to be effective from 1 July 2023. The 'Amended Finance Bill' proposes that the said amendment will be effective from 1 April 2023 instead of 1 July 2023.
- Rate of TCS: It is now proposed that the TCS rate for non-PAN holders and non-filers of tax returns shall be limited to 20%. This amendment will be effective from 1 July 2023.
- Interest Payable to a Business Trust: It is proposed that the interest payable to a business trust for securities issued by specified SPVs shall not be subject to TDS.
Marginal relief is proposed for taxpayers opting for the new tax regime where income exceeds INR 700,000 but tax on income exceeding this amount is more than the marginal income.
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Our Comments
The proposed increase in the tax rate for Royalties and Fees for Technical Services (FTS) would impact taxability of foreign companies in India as treaty rates would now be more beneficial. To avail the tax treaty benefits, companies must submit Form 10F in case the Tax Residency Certificate (TRC) does not contain the requisite information. Form 10F filing is now online and requires the PAN of the foreign entity. Furthermore, the foreign entity would be required to file its return of income in India. Accordingly, most foreign entities will now be required to obtain a PAN in India and undertake the requisite compliances.
The amendments relating to the taxation of units set up in an IFSC demonstrates the government's objective of making IFSCs more attractive destination for foreign investments.
The change in the taxability of Mutual Funds having less than 35% equity portfolio will result in an increase in tax liability, given there will be no taxation as long-term capital gains, which attract a lower rate of tax. However, the said amendment in the taxability will apply to investments made on or after 1 April 2023. As such, grandfathering is provided to investments made prior to 1 April 2023.
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