Future of Tax Incentives for Offshore Banking and IFSCs : Clause 147 of the Income Tax Bill, 2025 vs. Section 80LA of the Income Tx Act, 1961

 

Clause 147 Deductions for income of Offshore Banking Units and Units of International Financial Services Centre.

Income Tax Bill, 2025

Introduction

Clause 147 of the Income Tax Bill, 2025, proposes a comprehensive framework for tax deductions on specific incomes earned by Offshore Banking Units (OBUs) and Units of International Financial Services Centres (IFSCs). This provision is pivotal in the evolving landscape of India's financial sector, particularly in the context of the nation's ambition to establish itself as a global financial hub by leveraging Special Economic Zones (SEZs) and IFSCs. The clause is intended to replace and update the current Section 80LA of the Income-tax Act, 1961, which, along with Rule 19AE of the Income-tax Rules, 1962, has thus far governed the regime for such deductions.

The legislative intent behind Clause 147 is to streamline, clarify, and potentially expand the tax benefits available to qualifying entities, thereby fostering investment in and the growth of India's offshore banking and international financial services sectors. This commentary provides an in-depth analysis of Clause 147, examining its objectives, structure, and implications, while comparing its provisions with those of the existing Section 80LA and Rule 19AE. The analysis further explores practical impacts, interpretative nuances, and areas for potential reform.

Objective and Purpose

The primary objective of Clause 147 is to incentivize the establishment and operation of OBUs and IFSC units within SEZs by offering significant tax deductions on qualifying incomes. The provision aims to:

• Enhance the attractiveness of Indian SEZs and IFSCs as global financial destinations.

• Provide clarity and certainty in the tax treatment of OBUs and IFSC units.

• Align the tax regime with international best practices and evolving business models (e.g., asset leasing, cross-border financial services).

• Support the government's policy of promoting financial sector liberalization and attracting offshore capital flows.

Historically, Section 80LA was introduced to provide similar incentives, but the regime has undergone multiple amendments to adapt to changes in the financial sector, regulatory landscape, and policy priorities. The move to a new provision in the 2025 Bill reflects both the need for modernization and the consolidation of rules to ensure continued competitiveness in the global financial market.

Detailed Analysis of Clause 147

1. Eligible Assessees and Nature of Income - Sub-sections (1) and (3)

Clause 147(1) identifies two categories of eligible assessees:

1. A scheduled bank or a bank incorporated under foreign law having an OBU in an SEZ.

2. A unit of an IFSC.

The deduction applies to "income of the nature referred to in sub-section (3)," which is defined as:

• Income from an OBU located in an SEZ.

• Income from business activities specified in section 6(1) of the Banking Regulation Act, 1949, with undertakings in an SEZ or entities involved in developing, operating, or maintaining SEZs.

• Approved business activities of any IFSC unit set up in an SEZ.

• Income from the transfer of an aircraft or ship leased by an IFSC unit that commenced business by 31 March 2030.

This structure closely mirrors the scope of Section 80LA(1) and (2), but Clause 147 refines the categories and explicitly references the International Financial Services Centres Authority Act, 2019, and extends eligibility to units dealing with asset transfers (aircraft/ship leasing), reflecting the growing importance of such business models in IFSCs.

2. Quantum and Duration of Deduction - Sub-section (2)

Clause 147(2) provides for a 100% deduction of qualifying income:

• For OBUs (Clause 147(1)(a)): For ten consecutive tax years from the "relevant tax year."

• For IFSC units (Clause 147(1)(b)): For any ten consecutive tax years within fifteen years from the "relevant tax year," at the option of the assessee.

This approach is designed to offer flexibility, especially to IFSC units, by allowing them to select the most beneficial ten-year period within a fifteen-year window, recognizing the variable gestation and profitability periods typical in international financial services.

By contrast, Section 80LA originally provided a 100% deduction for five years and 50% for the next five years. However, recent amendments (Finance Act, 2023) have extended the 100% deduction for ten years, aligning with the new Clause 147. The option for IFSC units to choose their deduction window is retained, ensuring continuity and taxpayer choice.

3. Procedural Requirements - Sub-section (4)

Clause 147(4) mandates that the deduction is allowed only if the assessee submits, along with the return of income:

• A report in the prescribed form from an accountant certifying the correctness of the claim.

• A copy of the relevant permission or registration (from RBI, SEBI, or IFSC Authority).

This is substantially similar to Section 80LA(3), which requires a report in Form No. 10CCF (as per Rule 19AE) and a copy of the permission/registration. The emphasis on procedural compliance underscores the importance of regulatory oversight and the prevention of abuse of tax incentives.

4. Definitions and Interpretations - Sub-section (5)

Clause 147(5) defines key terms:

• "Relevant tax year" is tied to the year in which the requisite permission or registration is obtained.

• "Unit" is as defined in the SEZ Act, 2005.

• "Aircraft" and "ship" are as per Schedule VI Note 3.

These definitions are intended to ensure alignment with existing statutes and to avoid ambiguity, particularly important in cross-referencing regulatory approvals and sector-specific definitions.

Comparative Analysis with Section 80LA and Rule 19AE

1. Scope of Eligible Entities and Income

Both Clause 147 and Section 80LA cover scheduled banks and foreign banks with OBUs in SEZs, as well as IFSC units. The types of income qualifying for deduction are also broadly similar, including:

• Income from OBUs in SEZs.

• Income from banking business with SEZ undertakings or SEZ developers/operators.

• Income from approved business activities of IFSC units.

• Income from transfer of leased aircraft or ships (with certain commencement deadlines).

However, Clause 147 streamlines the language and explicitly references the IFSC Authority Act, 2019, for regulatory permissions, reflecting the institutional evolution in IFSC governance. The inclusion of asset transfer income (aircraft/ship) is also more clearly articulated, with a specific deadline for business commencement (31 March 2030), matching the latest amendments to Section 80LA.

2. Quantum and Duration of Deduction

Section 80LA originally provided a staggered deduction (100% for five years, then 50% for five years). Amendments effective from 1 April 2023 have harmonized this with a 100% deduction for ten years, aligning with Clause 147.

The option for IFSC units to select any ten consecutive years within a fifteen-year period is common to both provisions, allowing businesses to optimize tax benefits in accordance with their commercial cycles.

3. Procedural Compliance

Section 80LA(3) and Rule 19AE require the submission of a report from an accountant (Form 10CCF) and a copy of the relevant permission/registration. Clause 147(4) adopts the same framework, though the prescribed form for the accountant's report may be updated in the new rules. The core procedural safeguard-third-party certification of the deduction claim-remains a constant feature.

4. Definitions and Cross-References

Both Clause 147 and Section 80LA rely on definitions from the SEZ Act, 2005 (for "Unit" and "SEZ"), the Banking Regulation Act, 1949 (for business activities), and sectoral regulators (RBI, SEBI, IFSC Authority). Clause 147, however, provides more integrated and up-to-date cross-references, particularly regarding the IFSC Authority, reflecting the current regulatory landscape.

Section 80LA contains additional explanations for terms like "scheduled bank," "International Financial Services Centre," and "Special Economic Zone," ensuring clarity. Clause 147 appears to rely on the reader's familiarity with these terms, but the cross-references remain intact, minimizing interpretative uncertainty.

5. Rule 19AE: Accountant's Report

Rule 19AE prescribes Form 10CCF for the accountant's report u/s 80LA. Clause 147(4) requires a similar report but leaves the form to be prescribed. It is likely that a new or updated form will be notified to reflect any changes in reporting requirements or to align with the new statutory language.

Practical Implications

1. For Businesses (Banks and IFSC Units)

• Continued and clarified eligibility for substantial tax deductions, enhancing after-tax profitability and investment attractiveness.

• Flexibility in availing deductions, especially for IFSC units, allows for strategic planning in line with business cycles.

• Expanded recognition of asset leasing and transfer activities (aircraft/ship) as qualifying income supports the development of new business verticals within IFSCs.

• Emphasis on procedural compliance (accountant's report, regulatory permissions) increases the need for robust internal controls and documentation.

2. For Regulators and Tax Authorities

• Clearer statutory language and definitions facilitate easier administration and reduce litigation risk.

• Alignment with sectoral regulatory approvals (RBI, SEBI, IFSC Authority) ensures that only genuinely eligible entities benefit from the deductions.

• The requirement for third-party certification (accountant's report) provides an additional layer of scrutiny.

3. For Policy Makers

• The provision supports the government's policy of promoting India as an international financial centre and integrating the country into global financial markets.

• By extending and clarifying tax incentives, the law responds to the evolving needs of the financial sector and international investors.

Ambiguities and Potential Issues

• Definition of "Approved Business Activities": While the provision refers to "approved business activities" of IFSC units, the scope of such activities may be subject to interpretation or future regulatory clarification.

• Overlap with Other Incentives: The interaction of Clause 147 with other tax incentives or sector-specific benefits (e.g., those for SEZ developers) may require further clarification to prevent double-dipping or unintended exclusions.

• Procedural Rigor: The reliance on prescribed forms and accountant certification, while necessary for compliance, may increase administrative burden, especially if the reporting requirements are not harmonized with sectoral regulators.

• Transition Issues: Entities currently availing benefits u/s 80LA may require guidance on transitioning to Clause 147, particularly with respect to the continuity of deduction periods and procedural compliance.

Comparative Analysis with Other Jurisdictions

Globally, jurisdictions seeking to establish themselves as international financial centres (e.g., Singapore, Dubai, Hong Kong) offer similar tax incentives, including tax holidays, reduced rates, and exemptions for qualifying financial activities. The approach in Clause 147 is consistent with these international trends, focusing on:

• Time-bound, activity-specific tax deductions.

• Strict regulatory oversight and compliance requirements.

• Flexibility in the timing of deductions to accommodate business cycles.

The explicit inclusion of asset leasing (aircraft/ship) aligns with the practices of leading financial centres, which often target such high-value, cross-border activities for special incentives.

Conclusion

Clause 147 of the Income Tax Bill, 2025, represents a significant step in the evolution of India's tax regime for offshore banking and international financial services. By consolidating and updating the provisions of Section 80LA and integrating procedural requirements akin to Rule 19AE, the clause offers clarity, flexibility, and competitiveness. The provision is well-aligned with international best practices and is responsive to the changing needs of the financial sector. Nevertheless, careful attention will be required to address interpretative ambiguities, ensure seamless procedural compliance, and manage the transition from the existing regime to the new framework. Continued engagement with stakeholders and timely issuance of implementing rules will be critical to realizing the full potential of these incentives in positioning India as a preferred global financial centre.

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Full Text:

Clause 147 Deductions for income of Offshore Banking Units and Units of International Financial Services Centre.

 

 

Dated: 18-4-2025