2025 Finance Bill Amendments: Key Tax Reforms

The Finance Bill, 2025, was initially introduced to propose various changes to the Income-tax Act, 1961, aimed at strengthening India’s tax framework. Subsequently, the government introduced amendments to the original bill, refining key provisions to better support the financial sector—particularly International Financial Services Centres (IFSCs)—simplify taxpayer compliance, and enhance enforcement mechanisms. This document offers an overview of these amendments, analyzing their impact on the existing legal framework and the proposed modifications.

Section 9A: Certain Activities Not Constituting Business Connection in India

Existing Provision

• Section 9A(3)(c): Restricts aggregate participation or investment by Indian residents in an eligible investment fund to 5% of the fund’s corpus, whether direct or indirect.
• Section 9A(8A): Permits the Central Government to relax conditions under Section 9A(3) or Section 9A(4) for fund managers located in an IFSC, as notified in the Official Gazette.

Proposed Amendments

• Finance Bill, 2025 (Initial Proposal): Suggested that the Central Government could not alter Section 9A(3)(c), as the relaxation was already embedded in the Act.
• Government Amendment to Section 9A(3)(c): Excludes indirect participation by Indian residents from the 5% limit, requiring only direct participation to be monitored. This aims to reduce compliance burdens and facilitate the relocation of offshore fund managers to India.
• Government Amendment to Section 9A(8A): Restores the Central Government’s authority to modify or relax Section 9A(3)(c) as deemed necessary, reversing the initial proposal.

Section 44BBD: Presumptive Taxation for Non-Residents in Electronics Manufacturing

Proposed Amendments

• Finance Bill, 2025 (Initial Proposal): Section 44BBD is newly introduced, establishing a presumptive taxation regime for non-residents providing technology or services to electronics manufacturing facilities in India, deeming 25% of amounts received or paid as taxable profits.
• Government Amendment: Clarifies that income under this regime is exempt from taxation under Section 44DA (permanent establishment) and Section 115A (royalties and fees for technical services), preventing overlap with other provisions.

Section 47(viiad): Tax Neutrality for Fund Relocation

Existing Provision

• Section 47(viiad): Exempts capital gains tax on the transfer of shares or units from an original fund to a resultant fund (Category I or II AIF in an IFSC) during relocation, subject to specified conditions.

Proposed Amendments

• Finance Bill, 2025: Expands the definition of “resultant fund” to include retail schemes and ETFs regulated by IFSCA, contingent on compliance with Section 10(4D).
• Government Amendment: Eliminates the Section 10(4D) compliance requirement, allowing any IFSCA-certified retail scheme or ETF to qualify as a resultant fund without complying with any requirements under Section 10(4D), thereby simplifying the relocation process.

Section 10: Incomes Not Included in Total Income

Section 10(4D) – Expanded Exemption for Specified Funds

Existing Provision

• Section 10(4D): Grants exemption to income of specified funds, such as Category I or II Alternative Investment Funds (AIFs) in an IFSC, provided they meet conditions like residency in a notified area and adherence to prescribed guidelines.

Proposed Amendments

• Government Amendment: Broadens the exemption to include retail schemes and Exchange Traded Funds (ETFs) certified under the IFSCA (Fund Management) Regulations, 2022.

Section 10(4E) – Enhanced Exemptions for Non-Residents

Existing Provision

• Section 10(4E): Exempts income from the transfer of non-deliverable forward contracts or offshore derivative instruments entered into with an IFSC Offshore Banking Unit, including income distributed from such instruments, subject to conditions.

Proposed Amendments

• Finance Bill, 2025: Extends the exemption to transactions with Foreign Portfolio Investors (FPIs) operating as units in an IFSC.
• Government Amendment: Further includes income distributed from over-the-counter (OTC) derivatives entered into with Offshore Banking Units or IFSC FPIs.

Section 2(14): Revised Definition of Capital Asset

Existing Provision

• Section 2(14): Defines “capital asset” as property of any kind, excluding stock-in-trade, personal effects, rural agricultural land, and certain government securities.

Proposed Amendments

• Finance Bill, 2025: Amends the definition to include securities held by Category I and II AIFs regulated under SEBI (AIF) Regulations, 2012, as referenced in Section 115UB.
• Government Amendment: Extends this inclusion to securities held by Category I or II AIFs regulated under IFSCA regulations.

Chapter XIV-B: Refining Search Assessment Procedures

Existing Provision

• Chapter XIV-B (Sections 158B to 158BH): Governs block period assessments (up to 6 previous years plus the search period) based on search evidence and other material, with total income taxed at 60% under Section 113.
• Section 158BB: Computes total income from search findings and available data.
• Section 158BC: Requires a block return within 15 to 45 days, as specified in the notice.
• Section 158BD: Permits assessment of income for related persons based on search materials.
• Section 158BE: Sets a 2-year deadline for assessment completion from the end of the month of the last search authorization.
• Section 113: Applies a 60% tax rate to block period total income.

Proposed Amendments

• General Modification: Shifts the focus from “total income” to “total undisclosed income” throughout the chapter.
• Section 158BB: Restricts assessment to undisclosed income, comprising amounts declared in the block return or determined by the Assessing Officer (AO) from search evidence or other material. It excludes previously assessed or declared income, income from regular books, and income under Sections 115A(5), 115G, or 194P(1). Taxes such undisclosed income at 60%.
• Section 158BC: Establishes a 60-day period for filing a block return, extendable by 30 days for audit if the prior year’s return deadline is unexpired and a Section 44AB audit is required.
• Section 158BD: Defines the block period for related persons based on the latest end date among specified persons; abatement begins when the AO receives relevant materials.
• Section 158BE: Reduces the assessment completion timeline to 12 months from the end of the quarter of the last authorization, or 13 months if the audit extension applies.
• Section 113: Updates to tax “total undisclosed income” at 60%.

Section 143(1): Enhanced Return Processing

Existing Provision

• Section 143(1): Allows adjustments to returns for arithmetical errors, incorrect claims apparent from the return, or disallowance of unsupported losses or expenditures.

Proposed Amendments

• Government Amendment: Introduces a provision to verify consistency between the current return and prior years’ returns, with specific inconsistencies (e.g., discrepancies in claimed credits) to be prescribed.

Withdrawal of Equalisation Levy

The Equalisation Levy was introduced in 2016 as a 6% tax on digital advertising services provided by non-resident companies. It was imposed on payments made to foreign companies for online advertisements targeted at Indian users. With the rapidly changing digital market, the government has decided to withdraw this levy to simplify the tax structure and create a more welcoming environment for digital businesses. The proposed withdrawal is set to take effect from April 1, 2025.

This move is expected to benefit both taxpayers and the broader digital economy by reducing compliance burdens and encouraging investment in digital services.

Conclusion

The proposed amendments to the Finance Bill, 2025, present a balanced approach to reforming India’s tax system. They enhance the attractiveness of IFSCs through amendments to Sections 9A, 10(4D), 10(4E), 47(viiad), and 2(14), offering greater flexibility and exemptions to investment funds and non-residents. The introduction of Section 44BBD and revisions to Section 10(10D) provide clarity and relief for non-residents in targeted sectors.

Concurrently, the overhaul of Chapter XIV-B refines the assessment process to focus on undisclosed income, supported by shorter timelines, while Section 143(1) strengthens compliance through improved return scrutiny. Collectively, these measures aim to foster economic growth, streamline tax administration, and ensure greater transparency within the taxation framework.