Thinking of Setting Up a Unit in GIFT IFSC for Section 80LA Tax Exemption? Beware of This Hidden Cost!

 Setting up a unit in the Gujarat International Finance Tec-City (GIFT IFSC) has become increasingly popular among global and Indian businesses seeking tax-efficient structures. One of the biggest attractions is the tax holiday offered under Section 80LA of the Income-tax Act, 1961. However, before you move forward, it's crucial to understand a significant — and often overlooked — caveat.

📜 What the Law Says

Under Section 80LA, units approved by the International Financial Services Centres Authority (IFSCA) and set up in GIFT IFSC are eligible for:

• A 10-year tax holiday,
• Which can be claimed anytime within the first 15 years from incorporation,
• For income earned from the business activity approved by IFSCA.

So far, this sounds like a dream for tax planners.

But there’s a catch.

⚠️ The Hidden Cost – Foreign Tax Withholding

If your GIFT IFSC unit earns interest, dividends, capital gains, royalties, or fees for technical services (FTS) from clients outside India, and:

• The foreign client withholds tax in their country (as per their domestic law or Double Taxation Avoidance Agreement (DTAA) with India),
• You will not be able to claim any credit for that tax in India.

Why?
Because your IFSC unit is not paying tax in India (thanks to the 80LA tax holiday), there’s no Indian tax liability to set off the foreign tax against. That foreign tax becomes a real, unrecoverable cost.

💡 Example: The “Invisible” Tax Cost

Suppose your IFSC unit earns ₹1 crore in interest income from a Singapore-based entity.
Under the India-Singapore DTAA, Singapore withholds 10% as tax at source:

• Singapore withholds ₹10 lakhs.
• Your unit receives ₹90 lakhs.
• Since you're claiming exemption under Section 80LA, there's no Indian tax to offset the ₹10 lakhs against.

Net  effect?    That ₹10 lakhs is a permanent tax cost, despite your unit being “tax-exempt” in India.

🧾 Also, Don’t Forget MAT/AMT

If your IFSC entity:

• Is a company that hasn't opted for the concessional tax regime under Section 115BAA, or
• Is an LLP, then MAT (Minimum Alternate Tax) or AMT (Alternate Minimum Tax) at 9% plus surcharge and cess still applies even if you claim exemption under 80LA.

 

📌 Key Takeaways

• ✅ Income of IFSC units may be tax-exempt in India under Section 80LA.
• ❌ Foreign tax withholding can still apply, depending on the source country.
• ❌ No foreign tax credit (FTC) is allowed if there’s no tax payable in India.
• 🧮 This makes pricing, deal structuring, and commercial negotiations critical. The foreign tax leakage must be factored into your effective post-tax return.

🔍 Conclusion : While GIFT IFSC offers a compelling tax regime, it's not without its complexities. Before setting up, take a close look at your client base, types of income, and international tax exposure. What appears to be a tax-free structure might end up with hidden costs abroad — and these can materially impact your profitability