The Indian government has announced a major relief for the units of 14 service sectors in the International Financial Services Centre (IFSC) by exempting certain payments made to them from TDS (Tax Deducted at Source) provisions, effective from April 1, 2024. This move aims to reduce the tax compliance burden and to promote IFSC as a global investment destination. In this article, we will explain what are the payments exempted from TDS, what are the conditions for availing the exemption, how long will the exemption be valid, and what are the benefits of the exemption.
What are the payments exempted from TDS?
According to the notification issued by the Central Board of Direct Taxes (CBDT), no TDS will have to be deducted for payments to units in sectors like FinTech, banking, fund management, finance company, credit rating agency, insurance intermediary and investment banking. These sectors are considered to be crucial for the development of IFSC as a hub for financial innovation and services. The payments that are exempted from TDS include:
- Professional/referral fee: This is the fee paid to a professional or an entity for providing services or referring clients to another entity. For example, a fund manager in IFSC may pay a referral fee to an investment advisor for bringing investors to the fund.
- Brokerage income: This is the income earned by a broker or an intermediary for facilitating transactions or deals between two parties. For example, a stock broker in IFSC may earn brokerage income for executing trades on behalf of clients.
- Interest on External Commercial Borrowings /Loans: This is the interest paid by a borrower to a lender on loans or borrowings taken from outside India. For example, a bank in IFSC may pay interest on loans taken from foreign banks or institutions.
- Insurance commission: This is the commission paid by an insurance company to an agent or a broker for selling or renewing insurance policies. For example, an insurance intermediary in IFSC may receive commission for selling insurance products to clients in IFSC or outside India.
- Dividend: This is the distribution of profits by a company to its shareholders. For example, a finance company in IFSC may pay dividend to its shareholders out of its profits.
- Credit rating fee: This is the fee paid by an issuer or a borrower to a credit rating agency for assigning or reviewing a credit rating. For example, an investment bank in IFSC may pay credit rating fee to a rating agency for rating its bonds or securities.
What are the conditions for availing the exemption?
The notification states that the exemption will be applicable only if the following conditions are met:
- The unit is located in IFSC and has commenced operations on or after April 1, 2024. IFSC is a special economic zone in Gujarat that offers various tax and regulatory incentives to attract financial entities and investors from across the world.
- The unit furnishes a declaration in Form No. 1 to the payer stating that it is eligible for the exemption. Form No. 1 is a prescribed form that contains details of the unit, the payer, the payment and the exemption claimed.
- The payer furnishes the particulars of such payments in the TDS statement. The TDS statement is a quarterly statement that contains details of all payments made by a person or an entity on which TDS is applicable.
How long will the exemption be valid?
The notification shall come into force from April 1, 2024, and the relaxations provided therein shall be applicable for 10 consecutive assessment years. An assessment year is a period of 12 months starting from April 1 and ending on March 31 of the next year. For example, if a unit commences operations in IFSC on April 1, 2024, it will be eligible for the exemption till March 31, 2034.
What are the benefits of the exemption?
The exemption from TDS is expected to boost the growth and development of IFSC as a tax-neutral enclave for the financial sector. It will also reduce the cash flow issues and administrative hassles for the units operating in IFSC. Moreover, it will enhance the appeal of establishing fund structures and investment advisory services in IFSC.
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