Exemption from withholding of tax on rentals received by ship-leasing units set up in IFSC (Section 80LA, Section 194I)

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BACKGROUND

As per the Income Tax Act (‘IT Act’), a unit set up in International Financial Services Centre (‘IFSC’) is eligible to claim 100% of its profits as deduction under Section 80LA of the IT Act, for a period of 10 years. The unit can choose this 10 years period out of block of 15 years commencing from the year in which registration under International Financial Services Centres Authority Act, 2019 was obtained.

Further, if the unit leases a ship from a non-resident, the royalty or interest income earned by the non-resident is also exempt from tax, provided the IFSC unit has commenced operations before 31 March 2024. Thus, tax break is extended to an IFSC unit engaged in leasing of ships, as well as to a non-resident.

BRIEF ABOUT NOTIFICATION NO. 57 OF 2023

While the ship leasing unit in IFSC is eligible for a complete tax break on its profits, the income it earned was liable to withholding of tax under Section 194I of the IT Act. This was causing working capital blockage for the IFSC Unit.

The Central Board of Direct Taxation (‘CBDT’) has now notified that rental (including supplemental lease rentals) received on account of leasing of ships by a unit in IFSC to a resident lessee, will not be subject to withholding of tax u/s 194I of the IT Act. The notification is effective from 1 September 2023.

This benefit will be available for the period in which the ISFC unit chooses to claim tax break under Section 80LA of the IT Act. For any other year, the resident lessee will be liable to withhold tax at source under Section 194-I of the IT Act.

It may be noted that the exemption is subject to following stipulations:

  1. The Lessor will have to furnish to the lessee, a duly verified statement-cum-declaration in Form No. 1 (format provided in the Notification) giving details of years for which it wants to claim the deduction under Section 80LA. The declaration needs to be given annually.
  2. The Lessee, on receipt of Form No. 1 from the Lessor, shall not deduct tax at source on lease rental payments made by it to a unit in IFSC. Further, the lessee is required to disclose all the payments made to the IFSC unit on which TDS was not deducted in the quarterly withholding tax statements.