Comprehending Ministry of Finance Notification S.O. 21(E): IFSC Units' Tax Deduction Exemption

By means of its January 2, 2025, notification S.O. 21(E), the Ministry of Finance has significantly loosened the requirements for tax deduction at source (TDS) under Section 194Q of the Income-Tax Act, 1961. For transactions involving International Financial Services Centers (IFSCs), this announcement offers relief and clarity. It is anticipated that the action will facilitate commercial activity in these specialized financial zones and lessen the burden of compliance.

The announcement, its main clauses, and its ramifications for the buyers and sellers involved in these transactions are all thoroughly covered in this blog.

Important Points of the Notice

S.O. 21(E) states that, under certain circumstances, buyers who purchase items from designated sellers (IFSC Units) shall not be obliged to deduct tax under Section 194Q. The key provisions are broken down as follows:

1. Notification's Scope

The following transactions are covered by the notification:

• An International Financial Services Center (IFSC) is when the seller operates as a unit.
• The buyer would normally be required by Section 194Q of the Income-Tax Act to deduct TDS.

For sellers operating within IFSCs—specialized financial hubs created to support global trade and financial services—the exemption attempts to simplify tax compliance.

2. Sellers' Conditions

The following requirements must be met by sellers in order to qualify for the exemption under this notification:

• (i) Provide a Declaration-Cum-Statement: A statement-cum-declaration in the format specified in Form No. 1 must be provided by the vendor. The previous notification, S.O. 1135(E), dated March 7, 2024, provides specifics on this format. The following must be included in the declaration:
  • Information on the ten consecutive assessment years that the seller is seeking deductions for under Income-Tax Act Section 80LA.
• (ii) The Statement's Annual Verification: For each pertinent assessment year, the statement-cum-declaration needs to be confirmed in accordance with Form No. 1. This guarantees openness and adherence for the duration of the indicated period.

3. Buyers' Conditions

The following requirements must be met by buyers doing business with such sellers:

• (i) Payments Are Not Tax Deducted: The buyer is not required to deduct TDS under Section 194Q for payments made to the seller after receiving the seller's statement-cum-declaration.
• (ii) Providing Payment Information: According to Rule 31A of the Income-Tax Rules, 1962, buyers are required to provide the seller with a record of any payments they have made for which tax has not been withheld. This guarantees accurate reporting and transaction traceability.

4. The Length of the Relaxation

Only the 10 consecutive assessment years that the seller specifies in their statement-cum-declaration are eligible for the TDS exemption. Buyers must deduct tax in accordance with the regular rules of Section 194Q for payments made after this time, since they will not be entitled for the exemption.

Definitions and Explanations

The notification provides the following definitions of important terminology to guarantee clarity:

• (a) Vendor: A unit of an International Financial Services Center (IFSC) is required to be the seller. Section 80LA of the Income-Tax Act specifies this.
• (b) Purchaser: The definition of "buyer" as given in the Explanation to sub-section (1) of Section 194Q of the Income-Tax Act is still in effect.
• (c) The Center for International Financial Services (IFSC): Clause (q) of Section 2 of the Special Economic Zones Act of 2005 defines an IFSC. These are specialized areas created to accommodate international financial transactions.
• (d) The Unit: A "Unit" is an entity that falls under the definition of an IFSC in Section 2(zc) of the Special Economic Zones Act of 2005.

Justification for the Notification

The government's goal of making it easier to do business in India, especially in specialized economic zones like IFSCs, is in line with the implementation of S.O. 21(E). This notification helps stakeholders in the following ways:

For Vendors

• Decreased Adherence Burden: For transactions covered by this announcement, sellers operating in IFSCs are released from the responsibility of handling TDS-related deductions.
• Operational Ease: Sellers can concentrate on growing their businesses and luring more clients to IFSCs by streamlining the compliance structure.

For Purchasers

• Simplified Procedures: As long as they keep accurate records, buyers are released from the obligation to deduct TDS from transactions with IFSC Units.
• Improved Cooperation: By lowering administrative costs, this program strengthens buyer-seller ties.

Regarding Government Support for IFSCs

• Businesses are encouraged to operate in IFSCs by the exemption, which makes these areas desirable locations for global finance and trade.
• Economic Growth: Promoting IFSC activity helps the economy as a whole and solidifies India's standing as a major international financial center.

Requirements for Compliance

To take advantage of this notification, buyers and sellers must meet certain compliance requirements:

Vendors

• For each relevant evaluation year, the statement-cum-declaration in Form No. 1 must be submitted on time and verified.

Customers

• Must adhere to Rule 31A of the Income-Tax Rules by keeping correct payment records and submitting the necessary information.

Penalties or exclusion from the benefits offered under this announcement may follow noncompliance with these criteria.

Conclusion

An important step in promoting expansion and convenience of doing business in International Financial Services Centers is S.O. 21(E). The Ministry of Finance hopes to empower companies in these areas and increase India's competitiveness in trade and finance globally by offering targeted exemptions and simplified procedures.

To fully profit from the notification, taxpayers—buyers and sellers alike—must make sure that the terms specified in the notice are strictly followed. It is advised to speak with a tax expert for additional advice or to help you understand the intricacies of the Income-Tax Act.

In addition to demonstrating the government's dedication to supporting IFSCs, this notification highlights its overarching goal of creating a strong and internationally integrated financial sector.

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