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P-notes, SGX Nifty Trading At GIFT City Likely To Increase
Nirmala Sitharaman, Union Minister of Finance and Corporate Affairs, in accepting offshore derivative instruments (such as PNs) as legitimate contracts for growing economic activity in the GIFT City International Financial Services Centre (IFSC) has brought PNs into even more prominence considering that income distribution on PNs is now tax-exempt
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Foreign investors' use of Participatory Notes (PNs) to invest in the Indian securities market has routinely made headlines.
Any limitation on its operations has had an adverse impact on the securities market, resulting in an exodus of foreign funds.
The Securities and Exchange Board of India (SEBI), the market regulator, has been taking measures to strengthen transparency by requiring KYC of investors benefiting from investments through PNs. In addition to SEBI’s cautious approach towards issue and transfer, PNs deliver benefits as well. For instance, the income of the non-residents on the transfer of PNs has been excluded from the purview of tax from the assessment year 2022–23 onward.
Further, the support shown by Nirmala Sitharaman, Union Minister of Finance and Corporate Affairs, in accepting offshore derivative instruments (such as PNs) as legitimate contracts for growing economic activity in the GIFT City International Financial Services Centre (IFSC) has brought PNs into even more prominence considering that income distribution on PNs is now tax-exempt.
As per Section 10(4E) of the Income Tax Act, 1961 ("the Act"), non-resident income from the transfer of ODI in the IFSC Banking Unit (IBU) is exempt, and Section 115AD of the Act imposes a tax on IBU investment income in the form of capital gains, dividends, and interest income. IBU’s distribution of income to non-residents is also taxable under the current provisions.
Presently, the exemption only applies to the transfer of ODIs and not the distribution of earnings to non-resident ODI holders, which results in double taxation. Here, the budget has stepped in to deal with this anomaly by amending clause 4E of Section 10 of the Income Tax Act of 1961 to exempt such distributions of income to non-residents owning PNs. With this, the entire PN conduit is now tax-free. This, in a nutshell, strengthens and encourages the purpose of the establishment of the GIFT IFSCs, as they will attract more investments in the financial services sector through the ODI channels and increase the inflow of foreign funds. However, unless the KYC requirements are strictly enforced, this bag of exemptions will draw unaccounted fund flows into the Indian market, leading to economic destabilization by undermining the stability of financial systems.
Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.

Gagandeep Sood
The author is Group Heat, Fox Mandal & Associates. He is a goal-focused attorney with 9+ years of experience in Corporate and Taxation laws. He has demonstrated considerable dexterity in corporate tax advisory on foreign investments, cross-border trade and service arrangements. He has also assisted in the tax structuring of corporates engaged in manufacturing and service sectors with cost and profit management through effective tax planning.
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