Budget 2021 seeks to incentivize a host of activities undertaken in IFSC such as setting up of investment divisions of offshore banking units in IFSC, relocation of offshore funds in India, aircraft leasing activity in IFSC etc.

We have seen a considerable push from the government to make the International Financial Services Centre (IFSC) in GIFT City, a global financial hub. With the Finance Bill, 2021 (Bill), a slew of measures have been proposed to boost business activity in IFSC. We discuss some of these developments below.

1.  Promotion of offshore fund management from IFSC

A Business connection is a form of taxable presence in another country, similar to the Permanent Establishment (PE) concept under tax treaties. Business connection provisions under the Income Tax Act (ITA) seek to determine income deemed to accrue or arise in India. Generally, the concept of 'business connection' under the ITA is much broader than the concept of PE.

Section 9A of the ITA was however introduced to provide for a specific carve out from the application of these business connection provisions, subject to the taxpayer fulfilling certain conditions enumerated therein (Carve out Conditions). The Bill now provides that the government may notify relaxations in the fulfillment of one or more of such Carve Out Conditions for an eligible investment fund or its eligible fund manager, if the fund manager is located in an IFSC and has commenced operations on or before 31 March 2024. Thus, the full import of this provision would only be determined once the Government actually notifies the relaxations that would be available to the eligible fund manager located in IFSC.

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