Background:

The Finance Act 2025 has received presidential assent on March 29, 2025. Earlier, the Lok Sabha had passed the Bill on March 25, 2025, making 35 amendments to the original Finance Bill, 2025.

Some of the key amendments made to the original Finance Bill 2025 (now assented by the Hon’ble President) are provided hereunder:

1. Abolition of Equalization Levy:

The Equalization Levy was introduced in the Finance Act, 2016 at a rate of 6% for online/digital advertisement services provided by non-residents to residents in India. Pursuant to the Finance Act, 2020, the Equalization Levy was extended to e-commerce transactions conducted by non-resident operators at a rate of 2%.

Earlier, vide the Finance Act 2024, the Equalization Levy at 2% on the e-commerce transactions was abolished with effect from August 01, 2024. Now, as per the new amendment to the original Finance Bill, 2025 (now the Finance Act, 2025), the Government has abolished the Equalization Levy on online advertisement services with effect from April 01, 2025.

Further, section 10(50) of the Income-tax Act, 1961 (‘the Act’) is amended to provide that exemption from income tax on services/transactions subject to equalization levy shall not be applicable w.e.f. AY 2026-27 [i.e., April 01, 2025].

 KNAV Comments:

The US Government raised concerns regarding the Equalization Levy, suggesting that it could be seen as unfavourable to US tech companies. The decision to remove the Equalization Levy appears to reflect a more conciliatory approach towards the US, particularly in light of potential reciprocal tariffs scheduled to take effect from April 02, 2025. This step is aimed at reducing trade tensions and supporting the progress of ongoing negotiations. The tech giants such as Google, Meta, etc., will gain an advantage on account of such proposed amendment to abolish the Equalization Levy.

Further, the services/transactions earlier subject to equalization levy were exempt from royalty and FTS. However, on abolition of the equalization levy, such services/transactions will now be again subject to taxability under the Act.

2. IFSC – GIFT City-related amendments

The new amendment to the original Finance Bill, 2025 (now the Finance Act, 2025) has relaxed conditions for eligible investment funds and fund managers, except for the restriction that Indian residents’ aggregate participation or investment in the fund must not exceed 5% of the fund’s corpus. This condition may now be relaxed by the Central Government if necessary, and the requirement to consider indirect holdings for this calculation has been removed.

Securities held by Category I or II Alternative Investment Funds, complying with SEBI and IFSCA regulations, are now considered capital assets.

The deadline for specified funds to commence operations has been extended to March 31, 2030. However, the time limit for the commencement of operations by the investment division of an offshore banking unit was not extended. Hence, to maintain parity for all specified funds, the time limit for commencement of operations of the investment division of an offshore banking unit has also been extended from March 31, 2025, to March 31, 2030.

The new amendment to the original Finance Bill, 2025 (now the Finance Act, 2025) extends the exemption under Section 10(4D) to Retail funds and Exchange Traded Funds (ETFs) in the IFSC, provided they meet IFSCA conditions, without fulfilling additional requirements previously prescribed.

Any income accruing, arising, or received by a non-resident from Overseas Banking Units or Foreign Portfolio Investors (FPIs) operating in an IFSC as a result of the distribution of income on over-the-counter (OTC) derivatives shall be exempt from tax.

Furthermore, Section 10(10D) of the Act provides that proceeds received from a life insurance policy issued by an IFSC Insurance Intermediary Office shall be exempt from tax, without the condition related to the maximum premium payable on such policy. The term “IFSC Insurance Intermediary Office” has now been replaced with “IFSC Insurance Offices.”

KNAV Comments:

• By relaxing the participation conditions for investment funds, particularly the 5% cap on Indian residents’ aggregate participation, the amendments will encourage greater international investment in IFSCs, attracting foreign investors, simplifying the investment process and improving the global competitiveness of the Indian financial market.
• The extension of tax exemptions under Section 10(4D) of the Act for Retail funds and ETFs, with fewer conditions to be met, simplifies the tax structure and makes the IFSC more appealing to global investors and fund managers, encouraging the growth of financial products and services in these centres.
• The tax exemption on income earned from OTC derivatives by non-residents from Overseas Banking Units or FPIs operating in IFSCs will encourage further trading and investment in derivatives, thereby enhancing the liquidity and depth of the Indian financial markets.
• The amendment regarding life insurance policies issued by IFSC insurance offices, which eliminates the premium condition for tax exemptions, could stimulate the growth of the insurance sector within IFSCs, attracting both insurers and policyholders.
• Overall, these amendments make the IFSC sector more attractive for global investors, fund managers, and financial institutions, reinforcing India’s ambition to emerge as a global financial hub.

3. Other key amendments:

As per section 9A of the Act, fund management activity carried out through an eligible fund manager acting in India on behalf of non-resident fund shall not constitute business connection in India of the said fund. The fund is considered non-resident if, interalia, aggregate participation or investment in the fund, directly or indirectly, by persons resident in India does not exceed five percent of the corpus of the fund.

The amendment to the original Finance Bill 2025 (now the Finance Act, 2025)has revised the offshore fund management provisions. Indirect participation or investment by a person resident in India in an eligible investment fund outside India will no longer count towards the five percent condition.

KNAV Comments:

Prior to the amendment, both direct and indirect investments by Indian residents were counted within the 5 percent threshold for offshore funds. The revised provision reduces the compliance burden, as fund managers will not be required to track indirect holding through institutional investors. This move is expected to encourage more offshore fund managers to appoint Indian managers, boosting the fund management industry.

1. Section 44BBD of the Act (presumptive taxation scheme) is applicable to non-residents providing services or technology for setting up or operating electronics manufacturing facilities in India. An amendment in the Finance Bill, 2025 (now the Finance Act, 2025) clarifies that the provisions relating to permanent establishment and the taxation of royalty and fees for technical services (under Section 44DA of the Act and Section 115Aof the Act) will not apply to the income covered under section 44BBDof the Act.
2. Section 143(1) of the Act provides for the processing of income-tax returns, correcting errors such as arithmetical mistakes or incorrect claims apparent from the return. An amendment in the Finance Bill, 2025 (now the Finance Act, 2025) expands section 143(1)(a) to include checks for inconsistencies between current and previous years’ tax returns, as prescribed. While these specifics are yet to be defined, these may include mismatches in carry-forward of losses and unabsorbed depreciation or discrepancies in opening and closing written-down values (WDVs), among others.