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TMI BlogTaxation of income from Global Depository Receipts (GDRs) earned by resident employees of Indian companies or their subsidiaries engaged in specified knowledge-based industries or services : Clause 193 of the Income Tax Bill, 2025 vs. Section 115ACA of the Income Tax Act, 1961X X X X Extracts X X X X X X X X Extracts X X X X ..... sses the taxation regime applicable to income derived from Global Depository Receipts (GDRs) purchased in foreign currency, and capital gains arising from their transfer, by resident employees of Indian companies or their subsidiaries engaged in specified knowledge-based industries or services. This provision is a successor and, in many respects, a restatement with modifications of the existing Section 115ACA of the Income Tax Act, 1961. To understand the full import of Clause 193, it is essential to examine its objectives, structure, and implications, and to compare these with the extant Section 115ACA and the relevant notifications-namely, Notification No. S.O.1120(E) dated 12-11-2001 and Notification No. 11293 dated 28-03-2000 which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tent by specifying the eligible schemes-namely, "the Issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through Depository Receipt Mechanism) Scheme, 1993"-thereby ensuring that only bona fide ESOPs structured under government-approved frameworks benefit from the concessional regime. Detailed Analysis Clause 193 of the Income Tax Bill, 2025 1. Scope and Applicability Clause 193 (IT Bill, 2025): - Applies to a resident individual who is an employee of an Indian company (or its subsidiary, including those incorporated outside India) engaged in a "specified knowledge based industry or service." - Covers income from (i) dividends on GDRs issued under a notified ESOP and purchased in foreign currency; and (ii) long-term ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n Clause 193, whereas Section 115ACA provides a transition: 10% for transfers before 23rd July 2024, and 12.5% thereafter. - The dividend rate remains unchanged at 10% in both provisions. - The structure-separating the concessional incomes from other income for tax computation-remains constant. 3. Deductions and Computation Mechanism Clause 193: - If the gross total income consists solely of GDR dividends, no other deductions are allowed. - If the gross total income includes GDR dividends or GDR capital gains, the gross total income is reduced by such amounts for the purposes of computing deductions under other provisions. Section 115ACA: - Contains identical provisions regarding the denial of deductions where the gross total i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by an Overseas Depository Bank outside India or in an International Financial Services Centre (IFSC), issued against ordinary shares or foreign currency convertible bonds. The definition has been updated over time to include GDRs issued against shares of companies incorporated outside India, provided they are listed and traded in an IFSC. * Specified knowledge-based industry or service: Includes information technology software, information technology service, entertainment service, pharmaceutical industry, biotechnology industry, and any other industry or service as notified by the Central Government. * Subsidiary: Defined as per the Companies Act, 2013 (Clause 193) or Companies Act, 1956 (Section 115ACA), including subsidiaries incorp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eductions on such income simplifies compliance and prevents tax arbitrage. - The structure incentivizes employees to participate in global equity offerings, enhancing their alignment with corporate performance and global competitiveness. 2. For Employers (Indian Companies and Subsidiaries) - The ability to offer GDR-based ESOPs with concessional tax treatment is a valuable tool for talent acquisition and retention, especially in globally competitive industries. - The provision encourages Indian companies to access international capital markets and to structure employee compensation in line with global best practices. 3. For Regulators and Policymakers - The notification mechanism provides regulatory control, ensuring only genuine, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... subsidiaries Updated for new company law; otherwise similar Notification Requirement Central Government notification for eligible ESOP schemes Same No change Ambiguities and Potential Issues * Transition in Capital Gains Computation: The shift from exclusion of Section 48 provisos to exclusion of Section 72(6) may indicate a change in the computation mechanism for capital gains; this requires clarification in the context of the new Income Tax Bill's structure. * Definition of "Specified Knowledge-Based Industry or Service": While the core sectors are listed, the phrase "any other industry or service as specified by the Central Government" leaves room for further expansion, necessitating timely notifications for clarity. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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