Ms. Bahroze Kamdin (Partner, Deloitte India) and Ms. Alifya Hakim (Director) elucidate on the proposals relating to ISFC which streamline tax provisions across categories particularly in the insurance, fund management, aircraft, and ship leasing sectors. The authors inter alia discuss the simplified regime for Indian Fund Manager in IFSC, incentives for offshore banking unit in IFSC, and applicability of deemed dividend on lending to shareholder to Treasury Centres in IFSC. In conclusion, the authors comment, “The proposed amendments under the Finance Bill 2025 represent a significant step towards streamlining and simplifying tax for units in IFSC and also non-resident investors in IFSC, to increase the momentum for growth in IFSC.”  

“IFSC in Focus: Strategic Amendments to Boost Growth”

The Indian financial landscape has been significantly transformed by financial institutions in the International Financial Services Centre (IFSC) in Gujarat International Finance Tec-City (GIFT City) with more than 720 entities across categories set up there. IFSC GIFT City has improved its rank by five places and is now ranked 52nd in the Global Financial Centres index. Also, it has improved its rank by four places to rank 45 in the FinTech league.

Finance Bill 2025 introduces significant amendments to the income-tax law aimed at promoting set-up in IFSC and to streamline tax provisions across categories particularly in the insurance, fund management, aircraft, and ship leasing sectors. By aligning tax treatments with global practices, these changes aim to enhance India’s competitiveness as a hub for international financial services, attracting non-resident investors and businesses.

Income-tax Exemption on Proceeds from Life Insurance Policies issued by IFSC Insurance Offices

The insurance ecosystem in IFSC currently comprises 37 entities, including 15 IIOs (IFSC Insurance Offices) and 23 IIIOs (IFSC Insurance Intermediary Offices). The total (Re)insurance premium booked by IIOs is US$ 427 million, and the total (Re) insurance premium transacted by IIIOs is US$ 1,036 million till September 2024.

Section 10(10D) of the Income-tax Act, 1961 (the Act) provides tax exemption on sums received under life insurance policies, including bonuses. However, the exemption is subject to certain conditions, especially concerning the premium limits on unit-linked insurance policies (ULIPs) and other life insurance policies. Specifically, the exemption is not available if the annual premium or the aggregate premiums exceeds Rs. 2.5 lakhs for ULIPs and Rs. 5 lakhs for other life insurance policies.

In an effort to bring parity for non-residents purchasing life insurance policy issued by IFSC-based insurance offices, with that of non-residents placing deposits with banks in IFSC and non-residents investing in specified funds in IFSC, the Finance Bill 2025 proposes to exempt the proceeds received from all life insurance policies issued by IFSC Insurance office.

These amendments will come into effect from current year ending 31 March 2025.

It appears that there is a typo error in the Finance Bill 2025 as it refers to IFSC Insurance Intermediary office (IIIO) instead of IFSC Insurance Office (IIO) as insurance policies can be issued by IIO and not by IIIO.

Tax Free Relocation of Funds (generally from treaty jurisdictions) to GIFT IFSC extended: The asset management ecosystem comprises 128 fund management entities, 168 alternative investment funds (AIFs), and three investment advisors. By September 2024, AIFs had raised total commitments of US$ 12.1 billion.

1. As per the current provisions, the relocation of an offshore fund to a resultant fund in an IFSC, is treated as tax-neutral for the offshore fund, the resultant fund, and their shareholders/unit holders in the following manner:

• The transfer of assets from an offshore fund or its wholly owned subsidiary (WOS) to the resultant fund, upon relocation to the IFSC on or before March 31, 2025, will not be considered a transfer for tax purposes.

• Non-resident shareholders of the offshore fund will be exempt from tax on the transfer of shares, units or beneficial interests in the offshore fund in exchange for shares, units or beneficial interests in the resultant fund in the IFSC.

• Investments that are grandfathered in the offshore fund will continue to be exempt from capital gains tax on future sales by the resultant fund in the IFSC.

• The resultant fund will inherit the period of holding and cost base of the previous owner. • The deemed income provisions under Act will not apply to the resultant fund upon relocation.

Carry-forward losses of portfolio companies will remain unaffected by the relocation. Contributions made by the sponsor and/or manager are voluntary.

The set-up of the Fund in IFSC and commencement of operations was to be by 31 March 2025. The sunset dates for commencement of operations has been proposed to be extended to 31 March 2030 for the above benefits to be applicable.

2. At present, the term “resultant fund” is defined to mean a fund established in India and registered either as category I, II or III Alternative Investment Fund. It has been proposed to extend the meaning of “resultant fund” to cover a fund that has been granted a certificate as a retail scheme or as an Exchange Traded Fund under the IFSCA (Fund Management) Regulations, 2022.

Implified Regime for Indian Fund Manager in IFSC  

3. Section 9A of the Act provides that fund management activities conducted through an eligible fund manager on behalf of an eligible investment fund will not be considered a business connection in India, subject to certain conditions.

Sub-section (8A) allows the central government to modify these conditions for eligible funds and fund managers located in an IFSC, provided the manager commenced operations by March 31, 2024.

To enhance competitiveness with foreign jurisdictions, it is proposed to:

• Rationalize the 5% participation by Indian residents in the fund's corpus condition by assessing participation on April 1 and October 1 of the previous year, with a four-month grace period for compliance if the condition is not met on these dates.

• Relax conditions (a) to (m) for eligible investment funds managed by fund managers in IFSCs

• Extend timeline to commence operations by March 31, 2030.

These changes will take effect from 1 April 2025.

Benefits to aircraft and ship leasing businesses

1. About 29 aircraft leasing and 15 ship leasing companies have been set-up in IFSC. As of 31 March 2024, 20 aircraft lessors have leased out a total of 125 aircraft assets from GIFT IFSC, while 4 ships were leased from IFSC.

2. Clause (4H) of Section 10 provides a capital gains tax exemption for non-resident or units in IFSC on the transfer of equity shares in IFSC units engaged in aircraft leasing. Clause (34B) offers an exemption for dividend paid by an IFSC unit to another IFSC unit engaged in aircraft leasing. Given the similarity with ship leasing, where special purpose vehicles (SPVs) are used for vessels, it is proposed to extend these exemptions to ship leasing businesses.

These amendments will take effect from 1 April 2025.

3. At present, any income of a non-resident by way of royalty or interest, on account of lease of an aircraft or a ship, paid by an IFSC unit, is exempt from tax if the IFSC unit commences operations on or before 31 March 2025. (section 10(4F)).

Income arising to a unit in IFSC from the transfer of an asset, being an aircraft or a ship, which was leased by the IFSC unit, subject to commencement of operations on or before the 31 March 2025, is eligible for deduction under section 80LA of the Act.

Also, capital gains on transfer of shares of an IFSC unit, engaged in in the business of leasing of an aircraft (ship also proposed to be included vide Finance Bill 2025), arising to a non-resident or another unit in the IFSC also engaged in the same business, is exempt from tax (section 10(4H)), provided the IFSC unit commences operation on or before 31 March 2026.

The sunset dates for commencement of operations of IFSC units is proposed to be extended to 31 March 2030.

Incentives for offshore banking unit in IFSC extended

The banking ecosystem in IFSC GIFT City now includes a mix of foreign and domestic banks, focusing on foreign currency borrowing needs of Indian corporates and public sector enterprises. IFSC banking units (IBUs) have total assets over US$ 70 billion and cumulative transactions exceeding US$ 975 billion as of September 2024. Credit exposures of IBUs stand at over US$ 51 billion covering countries such as UK, Singapore, UAE etc. The cumulative trades by IBU and the cumulative non-deliverable forwards (NDF) crossed US$ 982 billion and 500 billion respectively.

Presently, certain incomes including capital gains and profits and gain from business and profession from securitisation trust, accruing or arising to or received by a specified fund being inter alia investment division of an offshore banking unit that commences operations in IFSC on or before 31 March 2025, is exempt under section 10(4D) of the Act. This date for commencement of operations is proposed to be extended to 31 March 2030.

Income from derivative and forward contract transactions with IFSC based FPIs, exempt

Clause (4E) of Section 10 currently excludes from total income, any income accrued or received by a non-resident from the transfer of offshore derivative instruments or over the counter derivatives or non-deliverable forward contracts or distribution of income on offshore derivative instruments entered into with an offshore banking unit of an IFSC, subject to specified conditions. It is proposed to amend this clause to include transactions entered into with units in IFSC which are registered as Foreign Portfolio Investors (FPIs), under the Securities and Exchange Board of India (Foreign Portfolio Investors) Regulations, 2019.

Deemed Dividend on lending to shareholder not applicable to Treasury Centres in IFSC

There are 5 core finance companies and 3 companies set-up in IFSC registered as global / regional corporate treasury centres.

Sub-clause (e) of Clause (22) of Section 2 defines "dividend" to include any advance or loan provided to a shareholder by a company (not being a company in which public are substantially interested), where the shareholder holds at least 10% of the voting power, or to any concern where the shareholder has substantial interest, to the extent that the company has accumulated profits. This also covers any payment made by the company on behalf of or for the benefit of such a shareholder.

However, sub-clause (ii) of Clause (22) excludes from the definition of dividend, any advance or loan made by a company in the ordinary course of its business, where lending money is a substantial part of its operations.

Cash management by a corporate treasury centre in an IFSC, from group entities, could inadvertently trigger the "deemed dividend" provisions for the shareholder. Therefore, it is proposed to amend Clause (22) of Section 2 of the Act. Under the proposed amendment, any advance or loan between two group entities, where one is a "finance company" or a "finance unit" in an IFSC set up as a global or regional treasury centre, and the parent or principal entity is listed on a stock exchange outside India (except in specified jurisdictions), will not be considered as "dividend." The conditions for defining "group entity," "parent entity," and "principal entity" will be prescribed.

These amendments will take effect from 1 April 2025.

Conclusion

The proposed amendments under the Finance Bill 2025 represent a significant step towards streamlining and simplifying tax for units in IFSC and also non-resident investors in IFSC, to increase the momentum for growth in IFSC.