The government has exempted certain payments made to units of 14 services sectors in IFSC from TDS provisions, which will take effect from April 1.

The Central Board of Direct Taxes (CBDT) in a notification said that no TDS will have to be deducted for payments to units in sectors such as fintech, banking, fund management entity, finance company, credit rating agency, insurance intermediary and investment banking.

The TDS exemption will now be applicable on payments such as professional/referral fee, brokerage income, interest on external commercial borrowings/loans, insurance commission, dividend and credit rating fee.

International Financial Services Centre (IFSC) in Gujarat is being developed as a tax-neutral enclave for the financial sector.

Nangia & Co LLP Partner Amit Agarwal said the notification by the CBDT offers a significant relief by exempting specified payments made to the units in IFSC from TDS.

Previously, exemptions from withholding tax were limited to payments associated with leasing of ships, leasing of aircraft among others. However, the recent notification broadens the scope, encompassing various payments such as interest on ECBs, professional fees, referral fees, dividend income to finance companies, banking units, etc, established in IFSC.

"From an M&A perspective, the inclusion of payments like investment advisory fees and professional fees to investment advisors and fund management entities respectively, enhances the appeal of establishing fund structures in IFSC," Agarwal said.

The process laid down includes the furnishing of Form No. 1 by an IFSC unit to the payer.