The Central Board of Direct Taxes ( CBDT ), vide notification no. S.O. 1135(E) dated 7th March 2024 has exempted the Tax Deduction at Source for International Financial Services Centre (IFSC) under the Income Tax Act, 1961. The board has exempted certain receipts from the TDS.
The notification outlined that the exemption applies to payments made by any ‘payer’ to a person designated as a Unit of International Financial Services Centre, referred to as the ‘payee.’
The lists of IFSC Units/ Payee includes Banking Unit, IFSC Insurance Intermediary office, Finance Company, Finance Unit, Fund Management entity, Broker Dealer, Investment advisor, Registered Distributor, Custodian, Credit rating agency, Investment banker, Debenture trustee, International Trade Finance Service or “ITFS” and FinTech Entity.
TDS & TDS EXEMPTION
TDS, or Tax Deducted at Source, refers to the predetermined sum deducted from various payments such as salary, commission, rent, interest, professional fees, etc. It is deposited with the government.
TDS exemption refers to situations where the government grants specific exemptions, relieving eligible individuals or entities from the obligation of paying TDS. These exemptions are implemented to alleviate the tax burden on taxpayers and organisations.
TDS EXEMPTION – NATURE OF RECEIPTS WITH RELEVANT TDS PROVISIONS
As per the notification, specific receipts are granted exemptions under the relevant provisions of the Income Tax Act. The board has categorised these receipts based on the IFSC Units. The following are the IFSC Units and the receipts exempted from TDS:
Banking Unit
Banking Unit shall have the same meaning as assigned to it in clause (c) of sub-regulation (1) of regulation 2 of the International Financial Services Centres Authority (Banking) Regulations, 2020.
The Interest income on External Commercial Borrowings /Loans, Professional fees, Referral fees, Brokerage income and Commission income on factoring and forfaiting servicesare the receipts exempted from TDS. The relevant provisions according to the receipts are Section 195, Section 194J, Section 194H, Section 194H and Section 194H respectively.
IFSC Insurance Intermediary office
The nature of receipt exempted from TDS is Insurance commission with the concerned provision of Section 194D.
Finance Company
The receipts exempted from TDS are Interest income on External Commercial Borrowings /Loans, Dividend income and Commission income on factoring and forfaiting services with relevant provisions of Section 195/194A, Section 194 and Section 194H.
Finance Unit
Interest income on External Commercial Borrowings /Loans, Dividend income and Commission income on factoring and forfaiting services are exempted from TDS with relevant provisions of Section 195/194A, Section 194 and Section 194H respectively.
Fund Management entity
Professional fee – Section 194J
Broker Dealer
Dividend – Section 194
Investment advisor
Investment advisory fee -Section 194J
Registered Distributor
Distribution fee and Commission fee – Section 194H
Custodian
Professional fee and Commission fee with relevant provisions of Section 194J and Section 194H respectively.
Credit rating agency
Credit rating fee – Section 194J
Investment banker
Investment banker fee -Section 194J
Debenture trustee
Trusteeship fee – Section 194J
International Trade Finance Service or “ITFS”
Commission income – Section 194H
FinTech Entity
Technical fee/Professional fee and Commission Income with relevant provisions of Section 194J and Section 194H respectively.
FORM 1 – TO BE FURNISHED BY IFSC UNIT (PAYEE)
The notification is enclosed with a Form 1, which shall be furnished by a Unit of International Financial Services Centre ( ‘payee’ ) to the ‘payer’. The Form 1 contains following details:
IMPACT OF NOTIFICATION ON IFSC UNITS
The exemption from TDS alleviates IFSC units, comprising diverse financial entities such as banking units, insurance intermediaries, finance companies, among others, from the task of deducting tax at the source for particular receipts.
The sole recipient of the notification’s benefits is the IFSC units, resulting in a favourable outcome for the industry. The TDS exemption on the fees, commission income etc. empowers IFSC units to streamline their tax obligations and capitalise on potential financial advantages, enhancing their overall operational efficiency and economic viability.
The government is providing a number of grants to the IFSC units, intending to create a drastic economic change in the economy. The Union Budget 2023 has granted GIFT IFSC more authority by transferring the registration and approval power previously held by SEZ authorities to the IFSCA.
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