Various incentive regimes apply as follows:

Incentives for Units in Special Economic Zones (SEZ)

The incentives and facilities offered to newly established business units (i.e., companies) in Special Economic Zones (SEZs) which begin manufacturing activity or provision of services during the period from 1 April 2006 until 31 March 2021, include:

Under Section 10AA of the Income Tax Act, a corporate tax exemption in respect of qualifying export income of the entity from the tax year in which it begins manufacturing activity or provision of services. The exemption is as follows:

100% exemption for the first consecutive 5 years;
50% exemption for the next 5 years; and
exemption for the next 5 years of the amount not exceeding 50% of the profit credited to the Special Economic Zone Reinvestment Reserve Account;

Exemption from Minimum Alternate Tax (MAT) under Section 115JB of the Income Tax Act;
Duty-free import/ domestic procurement of goods for development, operation, and maintenance of SEZ units;
Exemption from Goods & Service Tax (GST) and other levies as extended by the respective state governments;
External commercial borrowing by SEZ units up to USD 500 million is permissible in a year without any maturity restriction through recognized banking channels; and
Single window clearance for central and state-level approvals.

The qualifying export income is calculated using the formula:

Export income = (Profits of business x Export turnover of the SEZ unit) / Total turnover of the business.

The conditions that must be fulfilled for claiming the corporate tax exemption include the following:

The SEZ unit must not be formed by the splitting up, or reconstruction of a business that is already in existence;
The SEZ unit must not be formed by transfer of plant and machinery previously used for any purpose;
Effective 1 April 2023, the corporate tax return must be filed within the due date (see Sec. 14.3.); and
Effective 1 April 2023, export proceeds must be received or brought into India in convertible foreign exchange within 6 months from the end of the financial year or within a further period allowed by the competent authority. Export proceeds are deemed to be received in India if they are credited to a separate account maintained for this purpose by the taxpayer with any bank outside India, with the Central Bank’s approval (Reserve Bank of India).

Incentives for Developers of Special Economic Zones (SEZ)

The incentives offered to an undertaking or enterprise engaged in the development of SEZ (i.e., SEZ developer) where the development of SEZ begins until 31 March 2017, include:

Corporate tax exemption on income derived from the business of development of the SEZ for a block of 10 years out of 15 years under Section 80‐IAB of the Income Tax Act, subject to certain conditions;
Exemption from Minimum Alternate Tax (MAT) under Section 115JB of the Income Tax Act;
Exemption from customs/ excise duties for the development of SEZs for authorized operations; and
Exemption from GST.

International Financial Services Center (IFSC)

The Indian government has taken initiatives to develop an International Financial Services Center (IFSC) in India under SEZ route. Such IFSC is set up at the Gujarat International Finance Tec-City (GIFT City). An IFSC caters to overseas financial institutions outside India and undertakes transactions relating to the flow of finance, financial products, and services across borders.

The following tax incentives are available to units established in the IFSC:

Corporate tax exemption under Section 80LA of the Income Tax Act in respect of approved business income derived by the IFSC unit for a block of 10 years out of 15 years, subject to certain conditions;
Effective 1 April 2024, a withholding tax exemption has been introduced vide Notification No. 28/2024 on certain payments (including interest, dividend, commission and professional fee etc.) made to certain IFSC units claiming a 10-year corporate tax exemption under section 80LA(1A) of the Income Tax Act. The qualifying IFSC will be required to furnish a declaration in the specified form to the payer for each previous year relevant to 10 consecutive years for which it has opted to claim the exemption;
Exemption from GST;
Exemption from customs duties on the import of goods and services from outside India and on the supply of goods and services outside India;
Exemption from securities transaction tax, commodities transaction tax, and stamp duty on transactions carried out in the IFSC, provided such transactions are undertaken in foreign currency;
Exemption from capital gains on transfer of specified securities listed on a recognized stock exchange located in the IFSC, provided such transactions are undertaken in foreign currency;
Exemption from capital gains on the relocation of funds established in a jurisdiction outside India to an IFSC unit, provided the transfer is carried out prior to 31 March 2025 (extended from 31 March 2023);
A reduced MAT rate of 9%, provided the IFSC unit derives its income solely in convertible foreign exchange. The MAT provisions do not apply if the IFSC unit exercises the option for the reduced corporate tax rates of 22% and 15% (see Sec. 8.1.);
Exemption on dividends distributed by an IFSC unit (engaged in the aircraft leasing business) to another IFSC unit (engaged in the aircraft leasing business);
Dividend income received by non-residents from an IFSC unit is taxable at a concessional rate of 10% (plus applicable surcharge and cess);
Exemption on interest paid to a non-resident by an IFSC unit in respect of monies borrowed by it on or after 1 September 2019;
Reduced withholding tax of 4% on payment of interest to non-residents in respect of long-term bonds or rupee-denominated bonds issued between 1 April 2020 and 1 July 2023 and 9% on bonds issued after 1 July 2023 and listed on a recognized stock exchange in IFSC;
Exemption of income of a non-resident from offshore derivative instruments, or over-the-counter derivatives issued by an offshore banking unit located in IFSC;
Exemption of royalty or interest income of a non-resident derived from the lease of ships and aircraft to an IFSC unit; and
Exemption of income of a non-resident derived from a portfolio of securities or financial products or funds, managed or administered by any portfolio manager on behalf of such non-resident, in an account maintained with an offshore banking unit in IFSC, to the extent that such income accrues or arises outside India and is not deemed to accrue or arise in India.

Infrastructure Undertakings

The incentives offered to entities engaged in the development, maintenance, or operation of specified infrastructure facilities such as road, port, highway projects, etc., include:

100% corporate tax exemption on profits for a period of 10 consecutive years out of the first 15 years of operations, where such business operations have commenced before 1 April 2017; and
100% deduction of capital expenditure incurred on setting up of infrastructure facility, effective 1 April 2017.

Foreign Portfolio Investors (FPIs)

Foreign investment in India is regulated by the Securities and Exchange Board of India (‘SEBI’). Foreign investors can invest in capital market in India under the Foreign Portfolio Investment (FPI) route. The FPI regime was introduced in 2014 as a single route for foreign investment in India, merging the two existing modes of investment, viz. Foreign Institutional Investor (‘FII’) and Qualified Foreign Investor (‘QFI’). The SEBI notified the revised FPI Regulations on 23 September 2019 viz. SEBI (FPI) Regulations, 2019. A foreign investor is required to make an application in a specified format along with documentation for an FPI license and based on the risk profile, one of the following FPI licenses may be obtained:

Category I: Sovereign and international entities, certain regulated funds/ entities (e.g., government, government agencies, pension fund, insurance entities, banks, etc.); and
Category II: Other (e.g., corporates, unregulated funds in the form of partnerships, etc.).

Section 115AD of the Income Tax Act prescribes certain concessional tax rates in respect of income from securities earned by FPIs (see Sec. 8.2.1. and Sec. 8.2.3.). The regime does not include business income. An issue under considerable litigation was whether the activities of FPIs can be considered as investment activities (which are eligible for beneficial tax rates) or as business income. However, the amendment made in 2014 to the Act provides that investment made by FPIs in any securities in accordance with the SEBI regulations can be treated as capital asset. Hence, income from such investment is subject to beneficial rates provided under the domestic tax laws. Any other income arising to FPIs is subject to tax at the standard corporate tax rate. Further, MAT provisions are not applicable to FPIs (see Sec. 8.2.1.).

REIT and InvIT

Real estate investment trusts (REITs) and Infrastructure investment trusts (InvITs) are investment vehicles that can be used to attract investment in the infrastructure and real estate sectors and also relieve the burden on formal banking institutions. Regulations governing REITs and InvITs were introduced in India in 2014 and have been amended over a period of time in an endeavor to align them with stakeholders’ expectations. A pass-through status is provided to REITs and InvITs whereby the interest and dividend income received from Special Purpose Vehicles (SPVs) are exempt in the hands of the REIT/InvIT under Section 10(23FC) of the Income Tax Act and taxed in the hands of unitholders/ investors at the applicable rates.

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