IT Dept expands list of payments received by IFSC units for TDS relaxation

The Income Tax Department has exempted receipts by 14 types of units, set up in the International Financial Services Centre (IFSC) from Tax Deducted at Sources (TDS). Experts say such a move will help in expansion of business and investments.

The new norm will come into effect from April 1.

The units include banks, insurance intermediary, finance company, broker dealer, investment advisor, custodian, trade finance service and fintech, besides others. Receipts include professional fees, commission, dividend income, interest income on external commercial borrowing, referral fees, brokerage income, investment advisory fee, credit rating fee, trusteeship fee and technical fee etc. A detailed notification dated March 7 has been issued.

However, non-requirement of TDS will be subject to fulfilment of some conditions. For example, ‘payee’ (one who is receiving payment) shall furnish a statement-cum-declaration in Form No. 1, for each year, to the ‘payer’ (one is making payment) giving details of previous years relevant to the ten consecutive assessment years for which the ‘payee’ opts for claiming Section 80LA deduction. Another condition says ‘payer’ shall not deduct tax on payment made or credited to ‘payee’ after the date of receipt of copy of Form No. 1 from the ‘payee’, Also, ‘payer shall furnish the particulars of all the payments made to ‘payee’ on which tax has not been deducted in view of this notification in TDS statement;

It has been clarified that the TDS relaxation shall be available to the ‘payee’ only during the said previous years relevant to the 10 consecutive assessment years as declared by the ‘payee’ in Form No. 1 for which Section 80LA deduction is being opted. Further it has been said that that in any other year, the ‘payer’ shall be liable to deduct tax on payments as referred to in the list.

According to Amit Agarwal, Partner with Nangia & Co LLP, previously, exemptions from withholding tax were limited to payments associated with leasing of ships, leasing of aircraft among others. However, the recent notification broadens the scope, encompassing various payments such as interest on ECBs, professional fees, referral fees, dividend income to finance companies, banking units, etc., established in IFSC.

“From an M&A perspective, the inclusion of payments like investment advisory fees and professional fees to Investment Advisors and Fund Management entities respectively, enhances the appeal of establishing fund structures in IFSC,” he said while emphasising that such a move will help to promote IFSC as a global investment destination.”

Sumit Singhania, Partner with Deloitte India, says this is an important machinery provision being introduced in the law that helps align the tax exemption benefit for eligible IFSC units to withholding provisions. “Waiver of withholding requirement helps mitigate the cash trap IFSC units were to face. Moreover, this tax change is intended to add to growing traction in IFSC and accelerate the FDI flows in emerging financial /economic zones,” he said.

Sanjiv Malhotra, Senior Advisor, Shardul Amarchand Mangaldas & Co, felt that new list (which will be effective from April 1) such as interest income, dividends, commissions / professional fee etc. are core to many businesses operating there. “This provides one more reason for other companies to explore setting up operations in IFSC,” he said.

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