Legislative framework governing the taxation of income derived by non-residents from bonds and Global Depository Receipt : Clause 209 of Income Tax Bill, 2025 Vs. Section 115AC of the Income-tax Act, 1961

Clause 209 Tax on income from bonds or Global Depository Receipts purchased in foreign currency or capital gains arising from their transfer.

Income Tax Bill, 2025

Introduction

Clause 209 of the Income Tax Bill, 2025 represents a significant evolution in the Indian legislative framework governing the taxation of income derived by non-residents from bonds and Global Depository Receipts (GDRs) purchased in foreign currency, as well as capital gains arising from their transfer. This provision is the legislative successor to Section 115AC of the Income-tax Act, 1961, which, together with a series of government notifications, has historically regulated the tax treatment of such instruments. The present commentary provides a comprehensive and detailed analysis of Clause 209, juxtaposing it with the extant Section 115AC, and critically examines the interplay with key notifications, namely S.O.1032(E) dated 24-12-1993, Notification No. 28/2008 dated 21-02-2008, and Notification No. 243/2002 dated 10-09-2002. This analysis is undertaken in the context of India's broader policy objectives of attracting foreign capital, ensuring tax certainty, and aligning domestic law with international financial practices.

Objective and Purpose

The legislative intent behind Clause 209, much like its predecessor Section 115AC, is to provide a special, concessional tax regime for non-residents investing in specified Indian financial instruments-namely, bonds and GDRs-purchased in foreign currency. The rationale is twofold:

1. Attracting Foreign Investment: By offering certainty and lower rates of taxation on interest, dividends, and capital gains, India seeks to incentivize non-resident investment in its corporate and public sector debt, as well as in equity through GDRs. This is crucial for augmenting foreign exchange reserves and deepening the domestic capital market.
2. Policy Clarity and Compliance: The provision delineates clear tax rates and compliance requirements, thereby reducing ambiguity for foreign investors and intermediaries. The legislative framework is supplemented by government notifications specifying eligible schemes and intermediaries, ensuring that only investments routed through approved channels benefit from the concessionary regime.

The historical background includes the liberalization of the Indian economy in the early 1990s, which necessitated the creation of transparent, investor-friendly tax provisions for cross-border capital flows, culminating in the enactment of Section 115AC and subsequent notifications.

Detailed Analysis of Clause 209 of the Income Tax Bill, 2025

1. Structure and Scope

Clause 209 is structured to specify the tax rates applicable to different types of income accruing to non-residents from specified securities. The provision is comprehensive, covering:

• Interest income from bonds issued by Indian companies or public sector companies.
• Dividend income from GDRs issued against shares of Indian companies or public sector companies.
• Long-term capital gains from the transfer of such bonds or GDRs.

The provision is operative only where the securities are purchased in foreign currency and, for GDRs, through an "approved intermediary" as per a government-notified scheme.

2. Tax Rates and Income Categories

The Clause prescribes the following rates:

Sl. No.	Type of Income	Tax Rate
1	Interest on eligible bonds	10%
2	Dividend on eligible GDRs	10%
3	Long-term capital gains from transfer of such bonds or GDRs	12.5%
4	Other income	Normal rates

This clear demarcation of tax rates provides certainty to investors and aligns with the concessional treatment traditionally accorded to non-residents in respect of such instruments.

3. Deductions and Gross Total Income Adjustments

Clause 209(2) echoes the principle that where the gross total income of a non-resident consists only of the specified interest or dividend income, no deductions are allowed u/ss 26 to 61, section 93(1)(a) or 93(1)(e), or under Chapter VIII. Where the gross total income includes both specified and other income, the specified income is excluded for the purposes of computing deductions under Chapter VIII, which are then allowed on the balance.

4. Computation of Capital Gains 

The Clause 209(3) provides that the provisions of section 72(6) (presumably dealing with set off of losses) shall not apply for computation of long-term capital gains from the transfer of the specified securities. This ring-fences such gains from set-off, ensuring the concessional rate is applied to the entirety of the gain.

5. Exemption from Filing Return 

Clause 209(4) provides that a non-resident is exempt from filing a tax return if their total income consists solely of the specified interest and dividend income, and tax has been deducted at source as per Chapter XIX-B. This eases compliance for passive investors and aligns with international best practices.

6. Amalgamation/Demerger Provisions 

Where securities are acquired in an amalgamated or resulting company by virtue of holding in the amalgamating or demerged company, the concessional regime continues to apply, ensuring continuity of tax treatment in corporate restructurings.

7. Definitions

The Clause defines "approved intermediary" and references the meaning of "Global Depository Receipts" as assigned in section 190(4)(a), ensuring consistency across the legislative framework.

Comparative Analysis with Section 115AC of the Income-tax Act, 1961

1. Structural Parity and Legislative Continuity

Clause 209 largely mirrors the structure of Section 115AC, reaffirming the intent to maintain continuity in the concessional tax regime for non-resident investors. Both provisions:

• Apply to non-residents investing in bonds and GDRs in foreign currency.
• Specify tax rates for interest, dividends, and long-term capital gains.
• Restrict deductions for such income and provide for return filing exemptions.
• Ensure seamless treatment in cases of amalgamation or demerger.

This structural parity demonstrates the legislature's commitment to stability and predictability in the taxation of cross-border investment.

2. Key Differences and Updates

• Capital Gains Tax Rate:
  • Section 115AC originally prescribed a 10% rate for long-term capital gains. However, following the Finance (No. 2) Act, 2024, this was amended to a two-tier rate: 10% for transfers before 23 July 2024 and 12.5% for transfers thereafter.
  • Clause 209 enshrines the 12.5% rate, reflecting the updated policy choice to modestly increase the tax on such capital gains prospectively.
• Reference to Schemes and Intermediaries:
  • Both provisions require that eligible securities be issued as per schemes notified by the Central Government and, for GDRs, purchased through "approved intermediaries." The notifications u/s 115AC, including S.O.1032(E), Notification No. 28/2008, and Notification No. 243/2002, continue to be relevant in defining the scope of eligible instruments and intermediaries under Clause 209, unless new notifications are issued under the 2025 Act.
• Return Filing Exemption:
  • Section 115AC(4) refers to section 139(1) for return filing, whereas Clause 209(4) refers to section 263(1) of the new Bill. Functionally, both achieve the same objective: exemption from return filing where only specified income is earned and TDS is deducted.
• Definitions:
  • Section 115AC refers to the definition of GDRs in section 115ACA, while Clause 209 refers to section 190(4)(a). This reflects a renumbering and possible consolidation of definitions in the new Bill.
• Restriction on Set-off:
  • Section 115AC(3) excludes the application of the first and second provisos to section 48 (indexation, foreign exchange fluctuation adjustment), whereas Clause 209(3) excludes section 72(6) (likely referring to set off of losses). This may signal a change in the computational mechanics for capital gains, and requires clarification in the final legislation or rules.
• Technical Updates:
  • Clause 209 updates references to deduction sections (e.g., "sections 26 to 61" instead of "sections 28 to 44C") and chapters, reflecting the reorganization of the Bill vis-`a-vis the 1961 Act.

3. Notifications: Scope and Legal Significance

• a. S.O.1032(E) Dated 24-12-1993

  • This notification specifies the "Foreign Currency Convertible Bonds and Ordinary Shares (Through Depositary Receipt Mechanism) Scheme, 1993" as a notified scheme for the purposes of Section 115AC(1)(a). Its continuing relevance lies in ensuring that only bonds and shares issued under this scheme qualify for the concessional regime. The notification thus acts as a gatekeeper, delineating the universe of eligible instruments.

• b. Notification No. 28/2008 Dated 21-02-2008

  • This notification brings the "Issue of Foreign Currency Exchangeable Bonds Scheme, 2008" within the ambit of Section 115AC, thereby extending the concessional tax regime to such bonds. The notification demonstrates the legislative and executive flexibility to expand the scope of eligible instruments as financial markets evolve.

• c. Notification No. 243/2002 Dated 10-09-2002

  • This notification reiterates and updates the specification of the 1993 Scheme for various assessment years, ensuring continuity and legal certainty for investors and issuers. It also references subsequent amendments to the principal scheme, reflecting the dynamic nature of regulatory oversight in this area.

4. Ambiguities and Issues in Interpretation

• Scheme Notification Requirement:
  • Both Section 115AC and Clause 209 require that eligible bonds or GDRs be issued "in accordance with" or "as per" a scheme notified by the Central Government. The language in Clause 209 ("as per with such scheme as notified by the Central Government") is more streamlined, but the substance remains unchanged. However, the continued reliance on notifications means that the scope of eligible instruments is at the discretion of the executive, which could be a source of uncertainty if notifications are not updated in tandem with market developments.
• Definition of "Approved Intermediary":
  • Clause 209(6)(a) and the Explanation to Section 115AC define "approved intermediary" by reference to government-notified schemes. The lack of a statutory definition, and the reliance on executive notification, could lead to interpretational disputes, especially as financial markets evolve and new types of intermediaries emerge.
• Computational Mechanics for Capital Gains:
  • The shift from excluding the first and second provisos to section 48 (as in Section 115AC) to excluding section 72(6) (in Clause 209) may have significant computational consequences. Section 48 deals with indexation and exchange rate adjustments, while section 72(6) (presumably in the new Bill) deals with set-off of losses. The rationale for this change and its impact on the effective tax burden on capital gains should be clarified in the explanatory memorandum to the Bill or through subordinate legislation.
• Continued Applicability of Notifications:
  • While Clause 209 seems to grandfather the concessional regime for securities issued under existing notifications, the transition to the new Act may necessitate re-notification or affirmation of schemes and intermediaries. The absence of such action could create uncertainty for investors and intermediaries.

Practical Implications

1. For Non-Resident Investors

Clause 209, like Section 115AC, provides non-resident investors with a predictable, concessional tax regime for specified investments in Indian bonds and GDRs. The exemption from return filing, provided TDS is deducted, significantly reduces compliance burdens for passive investors. The clear specification of eligible instruments and intermediaries, subject to government notification, provides regulatory clarity, though the need for updated notifications remains.

2. For Indian Companies and Public Sector Undertakings

The provision incentivizes Indian issuers-both private and public sector-to raise capital from global markets by making their securities more attractive to non-resident investors. The certainty of tax treatment is a key selling point in international capital raising.

3. For Intermediaries

Only "approved intermediaries" as notified by the government are permitted to facilitate the purchase of GDRs. This ensures regulatory oversight but may limit competition or innovation in the financial sector unless the list of approved intermediaries is periodically updated.

4. For Tax Administration

The provision simplifies administration by ring-fencing specified income and exempting passive investors from return filing, provided TDS compliance is ensured. However, the continued applicability and updating of notifications, as well as the interpretation of new computational provisions, will require careful administrative guidance.

Conclusion

Clause 209 of the Income Tax Bill, 2025 represents a careful balance between providing tax incentives to attract foreign capital and ensuring regulatory oversight through the notification mechanism. The provision largely continues the policy framework established by Section 115AC of the Income-tax Act, 1961, with some technical updates and a modest increase in the capital gains tax rate, reflecting evolving fiscal policy considerations. The continued relevance of the existing notifications ensures a smooth transition for investors and issuers, though timely updating or re-notification may be required to avoid interpretational uncertainties. Going forward, clarity on the computational mechanics for capital gains, the scope of approved intermediaries, and the process for updating eligible schemes will be critical for maintaining the attractiveness and integrity of the regime. Judicial or administrative clarification may be warranted on the interplay between the new and old provisions and the continued applicability of existing notifications.

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Full Text:

Clause 209 Tax on income from bonds or Global Depository Receipts purchased in foreign currency or capital gains arising from their transfer.

 

Dated: 1-5-2025