Indian Finance Bill Removes Free Trade Zone Tax Breaks, Damages Venture Capital Sector

Mary Swire, Tax-news.com, Hong Kong

16 March 2000

The Indian Finance Bill contains serious restrictions on companies planning to take advantage of Free Trade Zones and Technology Parks. Section 10A of The Income Tax Act 1961 gives a 10-year tax exemption to qualifying companies, and it is this exemption which is being removed for new entrants after 31st March 2000.

This measure can only do damage, except possibly to the owners of existing unoccupied units who may be able to sell their companies to new entrants at inflated prices.

Another measure in the Finance Bill which has excited adverse comment is the imposition of the 22% tax rate on Indian Venture Capital Funds, which had been exempt from it. Undistributed income is included in the tax net, and if it is subsequently distributed after the statutory period it can be taxed again. It is quite simple to avoid the tax by basing the venture capital company in a low-tax country with which India has an appropriate Double Tax Treaty such as Mauritius, so the effect of this measure will at best simply be to drive the desperately-needed venture capital industry offshore, and at worst to kill it altogether.

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