Foreign banks in Gift City may get tax sops
2 min read . Updated: 19 Jan 2023, 11:25 PM IST
PremiumThe tax provision will impact long-term infra sector loans as the tax will come into play after the holiday period ends.
NEW DELHI : International banking units (IBUs) of foreign banks located in Gift City, Gujarat, may be given tax relief in the upcoming budget, according to people privy to the development.
They said an amendment to the Income Tax Act may be introduced in the Finance Bill 2023 to exempt IBUs operating out of Gift City from tax on interest income earned on foreign currency borrowings or “debt granted to government or Indian concerns".
The changes are aimed at encouraging IBUs to relocate to the International Financial Service Centre (IFSC) in Gift City that is being developed as a quasi foreign territory within the country to attract foreign investment across sectors.
As part of an exercise to develop the country’s only IFSC into a global financial services hub, the government in the 2019-20 budget announced a 100% tax holiday on profits of entities located there continuously for 10 out of 15 years, beginning with the year in which permission for the operation was given.
Now, exemption for interest income is being considered for IBUs to promote long-term foreign currency infrastructure financing by such entities.
“Under existing provisions of the I-T Act, interest income of IBUs of foreign banks on cross-border loans to Indian borrowers can get taxed in India on a gross basis at the rates of 5% and/or 20%, once the IBU finishes claiming its 10 years’ income-tax deduction benefit,"said Russel Gaitonde, partner, Deloitte India.
“Consequently, there could be a significant tax impact for the IBU of a foreign bank in case of loans that are not tax-protected, or a significant financial impact for the Indian borrower-clients of such IBU where the loans are tax-protected. Resultantly, the IBU might also lose some of its Indian borrower- clients to competitors, i.e. Indian domestic banks that have set up IBUs in IFSC-GIFT City, as such IBUs are not impacted by this tax anomaly, given that section 115A of the Act does not apply to Indian companies.
Hence, it is imperative that the government addresses this issue on a priority basis, so as to provide a level playing field to IBUs of foreign banks, vis-Ã -vis IBUs of Indian domestic banks," he added.
The tax provision will impact long-term infra sector loans as the tax will come into play after the holiday period ends.
Moreover, with tax calculated on gross basis, it would shrink the margins of international banks on a net basis making their operations in GIft City unproductive as compared to similar services being offered to Indian clients by foreign banks operating out of other global financial hubs .
Queries sent to the finance ministry and secretary, financial services remained unanswered till the press time.
As per the I-T Act, banking units of foreign banks in IFSC are liable to pay tax at the rate of 20% or 5% on gross interest income earned on foreign currency borrowings or debt granted to Government or Indian concerns.
The charge is perceived having harsh consequence whereby such banking units will be liable to pay tax on gross interest income even in case of net loss.
