Globalization has made it common for businesses and funds to operate across multiple countries. With this comes the challenge of determining where income should be taxed. To address these concerns, India introduced Section 9A of the Income Tax Act, which specifically deals with offshore funds & their connection (or lack thereof) to India.
This section is unique because it recognizes that not every activity conducted in India by a foreign fund should amount to a “business connection.” By doing so, it gives clarity to global investors while ensuring that Indian tax laws remain fair, transparent, and investment-friendly. Let’s explore in detail how this section works, what it covers, and why it matters.
What is Section 9A of the Income Tax Act?
Section 9A was introduced to create a level playing field for offshore funds. Its primary purpose is to define certain activities not to constitute business connection in India. This means that if a foreign fund or its managers carry out certain specified activities in India, they will not automatically be considered to have a taxable presence here.
This is crucial because without this safeguard, even minor or routine activities in India could expose offshore funds to Indian taxation. Section 9A offers them relief, clarity, & certainty.
Business Connection and Its Importance
In taxation, “business connection” refers to a relationship between an overseas entity & India that could trigger tax liability. If a business is deemed to have a business connection in India, its income attributable to Indian operations becomes taxable here.
Section 9A specifically lays out rules so that certain activities not to constitute business connection in India, thus protecting genuine offshore investment funds from unnecessary tax burdens. This clarity helps India attract foreign investments while safeguarding tax revenues from actual business operations.
Also Read: Income Deemed to Accrue or Arise in India
Offshore Funds and Double Taxation Relief
One of the biggest risks for international investors is double taxation—being taxed both in India & in their home country. Section 9A addresses this concern by ensuring that offshore funds are not subjected to double taxation.
For example, if a fund based in Singapore invests in Indian shares, and its manager visits India to oversee operations, Section 9A ensures that these actions don’t automatically trigger Indian taxation unless the fund actually has a taxable presence here. This relief boosts investor confidence and encourages greater capital inflow into India.
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Taxation of Income Arising from Transfer of Shares or Units
Another key aspect of Section 9A is its impact on the taxation of income arising from transfer of shares or units of an Indian company. Normally, such income could fall under Indian tax jurisdiction. However, Section 9A specifies conditions under which such transfers by offshore funds are protected from Indian taxation, provided the fund qualifies under the prescribed rules.
This ensures that foreign portfolio investors can buy and sell Indian securities without the constant fear of facing dual tax obligations.
Deduction in Respect of Expenditure on Production of Feature Films
Interestingly, Section 9A also touches upon the deduction in respect of expenditure on production of feature films. While at first glance this might seem unrelated, it highlights the wide scope of the Income Tax Act & its applicability to various industries.
By providing targeted deductions, the law not only supports India’s growing entertainment industry but also ensures that producers, investors, and distributors operate within a clear & predictable tax framework.
Also Read: Limitation on Interest Deduction in Certain Cases
Eligibility Conditions for Offshore Funds under Section 9A
For offshore funds to claim benefits under Section 9A, they need to meet certain conditions:
- The fund must be a resident of a country with which India has a Double Taxation Avoidance Agreement (DTAA).
- It should be regulated in its home country.
- It must have a minimum number of investors to prevent misuse.
- No single investor can hold an overwhelming majority stake.
- The fund should not carry out or control any active business in India directly.
These safeguards ensure that only genuine investment funds get the benefit, while tax loopholes are minimized.
Why Section 9A Matters for India
Section 9A has a broader economic impact beyond taxation. By clarifying what constitutes a taxable presence, it reassures global investors that India is a reliable & transparent investment destination. This directly benefits sectors such as equity markets, private equity, venture capital, and foreign portfolio investments.
Moreover, it aligns India’s tax policies with international best practices, reducing friction between global tax regimes and boosting India’s ease of doing business rankings.
Practical Example
Imagine an offshore fund manager based in London who visits India several times a year to meet company executives & analyze potential investments. Without Section 9A, these visits could create a taxable business connection in India, exposing the fund’s global income to Indian tax.
However, under Section 9A, such certain activities not to constitute business connection in India, meaning the fund is safe from Indian tax liability as long as it follows the rules. This clarity makes investment smoother, risk-free, and predictable.
Future of Section 9A
As India continues to integrate with global capital markets, provisions like Section 9A will play an even bigger role. With increasing focus on attracting offshore funds, we may see further relaxations, clearer definitions, and alignment with OECD guidelines.
At the same time, the government must balance investor incentives with safeguards against tax evasion. Section 9A is likely to evolve, but its core principle—encouraging genuine investment while avoiding unnecessary taxation—will remain intact.
Also Read: The Core of International Taxation and Transfer Pricing
Conclusion
The Section 9A of Income Tax Act is a landmark provision that balances India’s need for tax revenues with its goal of attracting foreign investments. By clarifying certain activities not to constitute business connection in India, it removes ambiguity for offshore funds. It also ensures that offshore funds are not subjected to double taxation and brings certainty to the taxation of income arising from transfer of shares or units of an Indian company.
For businesses, producers, and investors, it even extends to areas like deduction in respect of expenditure on production of feature films, making it versatile & wide-ranging.
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