Amendments relating to ‘Incomes which do not Form Part of Total Income’ by The Finance Bill 2022.

Amendments relating to Incomes which do not Form Part of Total Income by The Finance Bill 2022

1.  Provision inserted under Clause ( c ) of explanation to Section 10(4D) applicable w.e.f. 2022-23

As per Clause (c) of the explanation to Section 10(4D)m “Specified Fund” means –

(i)         A Fund established or Incorporated in India in the form of a Trust or Company or a Limited  Liability Partnership or a Body Corporate , –

(I)        which has been granted a certificate of registration as a Category III Alternative Investment Fund and is regulated under the Securities and Exchange Board of India  (Alternative Investment Fund) Regulations. 2012. made under the Securities and  Exchange Board of India Act. 1992 (15 of 1992) or International Financial Services  Centers Authority Act, 2019 (50 of 2019);

(II)       which is located in any International Financial Services Centre: and

(III)      of which all the units other than unit held by a sponsor or manager are held by non-residents;

For amendment see below :

(ii) investment division of an offshore banking unit. Which has been –

(I)        granted a certificate of registration as a Category I foreign portfolio investor under the Securities and Exchange Board of India (Foreign Portfolio investors) Regulations. 2019 made under the Securities and Exchange Board of India Act, 1992 (15 of 1992) and which has commenced its operations on or before the 31st day of March, 2024:
and

(II) fulfils such conditions Including maintenance of separate accounts for Its Investment division, as mar be prescribed:]

The Finance Bill. 2022 has inserted the following proviso for the purpose of item III above

Provided that the condition specified in item III shall not apply where any unit holder or holders. being nun-resident during the previous year when such unit or units were issued, becomes resident under clause (1) or clause (1A) of section 6 in any previous year subsequent to that year, if the aggregate value and number of the units held by such resident unitholder or unitholders do not exceed five per cent, of the total units issued and fulfill such other conditions as may be prescribed.

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2. Tax Incentives to Units located In International Financial Services Centre (IFSC)

[Section 10(4E), (4F), (4G), Section 56(viib) and Section 80LA(2)(d) amended w.e.f.  AY 2023-24]

(A) Reasons for making amendments

Over the past few years several tax concessions have been provided to units located in International Financial Services Centre (IFSC) under the Act to make it a global hub of financial services sector.

In order to further incentivize operations from IFSC. the Finance Bill. 2022 has provided the following additional incentives:

(B) Amendments made

(i)    Benefit of exemption under section 10(4E) also extended to income on account of transfer of offshore derivative Instruments  or over-the-counter derivatives:

As per the existing law the benefit of exemption under section 10(4E) was allowed to any income accrued or arisen to. or received by a non-resident as a result of transfer of non-deliverable forward contracts entered into with an offshore banking unit of an International Financial Services Centre as referred to in section 80LA(1A). which fulfils such conditions as may be prescribed.

The Finance Bill, 2022 has amended section 10(4E) w.e.f. AY 2023-24 to extend the exemption under the said clause to the income accrued or arisen to or received by a nonresident as a result of transfer of—

  • Offshore derivative instruments or
  • over-the-counter derivatives

entered into with an Offshore Banking Unit of an International Financial Services Centre. referred to in section 80LA(1A),

(ii) (a) Benefit of Exemption under Section 10(4F) also extended on account of Lease of a Ship:

As per the existing law, the benefit of exemption under section 10(4F) was allowed on account of any income of a non-resident by way of royalty or interest, on account of lease of an aircraft in a previous year. paid by a unit of an International Financial Services Centre referred to in section 80LA(1A) if the unit has commenced its operations on or before 31-3-2024 —

The Finance Bill, 2022 has amended the above Section 10(4F) w.e.f  AY 2023-24 to
extend the exemption under the said clause also to the income of a non-resident by way of royalty or interest, on account of lease of a ship in a previous year. paid by a unit of an International Financial Services Centre. if the unit has commenced its operations on or before 31-3-2024.

The Bill has also inserted an explanation to define “Ship”. According to clause (ii) of the explanation, ‘ship” means a ship or an ocean vessel, an engine of a ship or ocean vessel, or any part thereof.

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(b) Consequential amendment made in clause (d) of Section 80LA(2) –

 In view of the above amendment in section 10(4F). the following consequential amendment has been made in clause (d) of section 80LA(2) –

W.e.f. AY 2023-24. in addition to the income arising from the transfer of an asset being an aircraft, the income arising from the transfer of an asset, being a ship. which was leased by a unit of the International Financial Services Centre to any person shall also be eligible for deduction under section 80LA(1A) of the said section. subject to the condition that the unit has commenced operation on or before 31-3-2024.

The Bill has also provided that ship shall have the same meaning as provided under section 10(4F).

(iii) Certain Incomes received by a Non-resident to be Exempt [Section 10(4G) inserted w.e.f. AY 2023-24]:

The Finance Bill 2022 has inserted section 10(4G) to provide exemption to any income received by a non-resident from—

–           portfolio of securities or

–           financial products or

–           funds. managed or administered by any portfolio manager on behalf of such non-resident,

in an account maintained with an Offshore Banking Unit, in any International Financial Services Centre, referred to in section 80LA(1A), to the extent such income accrues or arises outside India and is not deemed to accrue or arise in India.

3.  Withdrawal of Exemption under Clauses (8), (8A), (8B) and (9) of Section-10

[Section 10(8), (8A), (8B) and (9) phased out w.e.f. AY 2023-24]

(A) Reasons for making Amendments

(i)        Section 10(8) of the Act provides for exemption to the income of an individual who is assigned duties in India in connection with any co-operative technical assistance programmes and projects. Such co-operative technical assistance programmes and projects are required to be in accordance with an agreement entered by the Central Government and the Government of a foreign state.

Exemption is provided to both –

  • the remuneration received by the individual From the foreign state for such duties: and
  • any other income accruing or arising outside India (which is not deemed to accrue or arise in India), in respect of which the individual is required to pay any income or social security tax to the Government of the foreign state.

(ii)       Section 10(8A) provides for exemption on the remuneration or fee received by a consultant, directly or indirectly out of the funds made available to an international organization (agency) under a technical assistance grant agreement between the agency and the Government of a foreign state. It also provides exemption to such consultant in respect of any income accruing or arising outside India (which is not deemed to accrue or arise in India), in respect of which the consultant is required to pay income or social security tax to the Government of the country of his or its origin.

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For the purposes of this clause, if the consultant is an individual he must be a foreign citizen or in case he is an Indian citizen he should be not ordinarily resident in India. In case the consultant is not an individual, such person is required to be non-resident.

Such Consultant should be engaged by the agency for rendering technical services in India in connection with any technical assistance programme or project. Such technical assistance programme or projects are required to be in accordance with an agreement entered into by the Central Government and the agency and the agreement relating to the engagement of the consultant is required to be approved by the prescribed authority.

(iii)      Section 10(8B) provides for exemption to an individual who is an employee of the consultant as referred to in section 10(8A). Such individuals are those who are assigned duties in India in connection with any technical assistance programme and project. These technical assistance programmes and projects are required to be in accordance with an agreement entered into by the Central Government and the agency.

The exemption is provided to the remuneration received by such individual, directly or indirectly, for such duties from any consultant referred to in section 10(8A). Exemption is also provided to any income accruing or arising outside India (which is not deemed to accrue or arise in India), in respect of which the individual is required to pay income or social security tax to the country of his origin. However, the individual must be the employee of the consultant. He may be a foreign citizen or if he is an Indian citizen, he is not ordinarily resident in India. It is also required that the contract of service of the employee is approved by the prescribed authority before the commencement of his service.

(iv)      Section 10(9) provides for exemption to the income of the family members of any individual or consultant as referred in sections 10(8), 10(8A) and 10(8B), who accompanies such individual or consultant to India. The exemption is provided to income accruing or arising outside India (which is not deemed to accrue or arise in India), in respect of which such member is required to pay any income or social security tax to the Government of that foreign state or country of origin of such member.

The exemptions as provided under the above-mentioned clauses have outlived their utility in the era of simplification of tax laws and where exemptions and tax incentives are being phased out as a matter of stated policy of the Government. Further, if under a tax treaty, India gets a right to tax a particular income and the other country is expected to then relieve double taxation by exemption or credit method, providing exemption by India amounts to surrender of right of taxation by India in favor of the other country.

(B) Amendments Made

The Finance Bill, 2022 has inserted a proviso under each of the above clauses (8), (8A), (8B) and (9) of section 10 to provide that the provisions of the said clauses shall not apply to remuneration, fee or income of the previous year relevant to the assessment year beginning on or after 1.4-2023.

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