Taxation and other laws amendment Act (TOLA) was passed by the parliament virtually without any discussion. Some important changes were made even beyond the original proposal contained in the Ordinance that was introduced earlier. In the last episode, we have discussed three such areas in detail. In the present episode, we discuss three more of such amendments are discussed.

The most important of these new amendments is the one relating to concessions given to the Diamond industry which has been going through a lean phase for quite some time now. In fact, in 2013 a task group was constituted to look into to make India an international trading hub for rough diamonds1. Concerns were also raised in 2014 and some steps were taken in the Budget 2016. Now, a complete exemption from income tax has been provided to foreign diamond mining companies for 15 years as detailed below:

Trading of Rough Diamond in India

In 2016, an amendment was made in section 9 of the Income Tax Act, 1961 whereby a " Special Notified Zone" (SNZ) was created to facilitate shifting of operations by foreign mining companies to India and to permit the trading of rough diamonds in India by the leading diamond mining companies of the world. This was to allay the fear that the activity of the foreign mining company of mere display of rough diamonds even with no actual sale taking place in India may lead to creation of business connection in India. Apparently, this potential tax exposure has been an area of concern for the mining companies willing to undertake these activities in India.2

In the Memorandum to the Finance Bill, 2016, it was mentioned that In order to facilitate the foreign mining companies (FMC) to undertake activity of display of uncut diamond (without any sorting or sale) in the special notified zone, section 9 of the ITA 1961 was amended to provide that in the case of a foreign company engaged in the business of mining of diamonds, no income shall be deemed to accrue or arise in India to it through or from the activities which are confined to display of uncut and unassorted diamonds in a Special Zone notified by the Central Government in the Official Gazette in this behalf.

Thus, the newly inserted Explanation (e) to section 9 (1) stated:

“in the case of a foreign company engaged in the business of mining of diamonds, no income shall be deemed to accrue or arise in India to it through or from the activities which are confined to the display of uncut and unassorted diamond in any special zone notified by the Central Government in the Official Gazette in this behalf.”

It seems that the clarification was not enough. The FM in her intervention in the Rajya Sabha had this to say in the matter.

“Foreign mining companies, Sir, are allowed, not today, since 2016, to display uncut or unassorted diamonds in specified or special notified zones, such as Mumbai and Surat and such display is exempted from forming a business connection in India. They come, bring stocks, display it, and whatever is chosen is also taken back and then they bill it from there. They have no other connection with any of the buyers or companies which are here. This has been on since 2016. For enabling sale of rough diamonds in these zones, safe harbour rules or a framework under rules 99-102 of the Income Tax Rules 2026 was provided for foreign mining companies engaged in the business of selling raw diamonds - uncut diamonds- wherein the profits and gains of the eligible business chargeable to tax shall be 4%. That is the safe harbour or more of the gross receipts from that business.

So, in order to promote the ecosystem for trading in raw and rough diamonds and provide tax certainty, it is proposed through this amendment that we are bringing, to expand the definition of ‘raw or rough diamonds' to include assorted diamonds and also provide exemption to a foreign company engaged in the business of diamond mining or a foreign company functioning as a sight holder, broker, aggregator or a tender and auction entity for such businesses for a period of 15 years up to tax year ending 31 st March, 2041.

We have elaborately mentioned each one of the categories so that there is no confusion about who is eligible and who is not eligible.

The new provision therefore is proposed to be inserted at serial number 13F of the table in schedule IV of the Income Tax Act 2025.

The amendment outcome Sir, what are we expecting from them? The amendment is expected to shift some of the diamond trading businesses which happens in places like Amsterdam, Antwerp or parts of Israel to move to India - diamond trading business to India and also promote ecosystem for financing of buying and selling of diamonds in India itself. Uh now also somewhat in Middle East, Dubai, and so on. So, all these people because of this exemption(s) provided can now do that wholesale business here and be accessible to Indian buyers. That is the outcome that we expect that the entire ecosystem can be available here. India is very well known for polishing and cutting the diamonds. Now if that business also moves here our diamond industry, which is a very labour intensive, maximum labour employment is provided by these units can benefit. 3

The new exemption provision is in serial No 13 F of the Table in Schedule IV and states as follows:

13F (New)

Note 5: For the purposes of Sl. No. 13F, the expression "rough diamond" means any diamond that is unworked or simply sawn, cleaved or bruted and falling under the Tariff Heading 7102 10, 7102 21, or 7102 31 of the First Schedule to the Customs Tariff Act, 1975 (51 of 1975) and accompanied by the Kimberley Process Certificate. 4

Although the FM stated that the provision is in force from 2016, we should note that the exemption provided at that time was only in respect of display, not of sale of rough diamonds . The safe harbour rules or as the FM mentions framework of rules are currently provided in Rules 99-102 of the Income Tax Rules, 2026. However, it has a longer history. In fact, the safe harbour @ 4% of the profit on sale of rough diamond was earlier provided in Rule 10 TIA of the IT Rules, 1962, inserted by Inserted by the IT (Tenth Amendment) Rules, 2024 with effect from 29th November 2024. The eligible assessee and eligible business was defined as follows:

-"eligible assessee" means a foreign company engaged in the business of diamond mining which has exercised an option for application of safe harbour rules in accordance with rule 10TIA

-"eligible business" means a business of selling raw diamonds in any notified special zone as referred to in clause (e) of Explanation 1 to clause (i) of sub-section (1) of section 9

Explanation 1 to clause (i) of sub-section 9 of the ITA, 1961stated as follows:

(e) in the case of a foreign company engaged in the business of mining of diamonds , no income shall be deemed to accrue or arise in India to it through or from the activities which are confined to the display of uncut and unassorted diamond in any special zone notified by the Central Government in the Official Gazette in this behalf.

This provision was added in 2016. After that, there was no further amendment to section 9 and in this provision, there was no mention of sale of rough diamonds. So, it is not understood how the safe harbour of 4% could be prescribed having recourse to this section.

Be that as it may, as mentioned earlier, through this amendment (TOLA), full exemption has now been given in respect of any income from the sale of uncut diamonds etc till 2041.

Although the FM has explained in her statement to the Rajya Sabha the reasons of the amendment, a clearer justification may be seen in a statement of Smt. Darshana Vikram Jardosh MP, Surat made way back in 2014:

"Hon. Speaker, Surat despite being the largest diamond manufacturing centre of the world, rough diamond mining companies of the world sell their goods through auctions and tenders held in cities such as Antwerp, Moscow, Gaborone, Johannesburg, Dubai, Tel Aviv, Hong Kong, New York, and such others.

The apparent reason for not holding rough diamond sales in India, are the existing laws, regulations and procedures for rough diamond import and returning of unsold goods. For example, suppliers in Israel and Belgium, India's competitors in this business, can send rough diamonds to their buyers, who can simply return those goods which they do not require. But, in case of India, the buyer has to make full payment for import, and thereafter while returning unwanted goods, the buyer would again have to go through all export formalities, including monetary transactions.

In order to simplify this, ‘Special Notified Zones' should be formed at Bharat Diamond Bourse (BDB) in Mumbai and Gems & Jewellery Park in Surat, from where rough diamond suppliers can smoothly import rough diamonds for trading, and can take back unsold goods in a hassle-free manner.

If this is done, it would give the Indian diamond industry a strong competitive advantage against other diamond centres of the world, by saving precious time as well as millions of dollars of foreign exchange that thousands of our diamantaires spend for travelling to buy rough diamonds from the various rough diamond suppliers across the globe."5

Relocation of managers - Investment funds registered outside India but managed from India

The other incentive in the area of international taxation brought in through this amendment Bill that was not in the Ordinance relates to the fond hope of the Government of India to lure fund managers to relocate to India by relaxing the conditions of business connection for this particular group. We may note that the efforts of the government in this regard have been going on since 2015 when a new section 9A was introduced in the Income Tax Act 1961 precisely for that purpose. The then FM in his budget speech stated:

“The present taxation structure has an inbuilt incentive for fund managers to operate from offshore locations. To encourage such offshore fund managers to relocate to India, I propose to modify the Permanent Establishment (PE) norms to the effect that mere presence of a fund manager in India would not constitute PE of the offshore funds resulting in adverse tax consequences."

The Memorandum further explained:

"In the case of off-shore funds, under the existing provisions, the presence of a fund manager in India may create sufficient nexus of the off-shore fund with India and may constitute a business connection in India even though the fund manager may be an independent person. Similarly, if the fund manager located in India undertakes fund management activity in respect of investments outside India for an off-shore fund, the profits made by the fund from such investments may be liable to tax in India due to the location of fund manager in India and attribution of such profits to the activity of the fund manager undertaken on behalf of the off-shore fund. Therefore, apart from taxation of income received by the fund manager as fees for fund management activity, income of off-shore fund from investments made in countries outside India may also get taxed in India due to such fund management activity undertaken in, and from, India constituting a business connection. Further, presence of the fund manager under certain circumstances may lead to the off shore fund being held to be resident in India on the basis of its control and management being in India.

There are a large number of fund managers who are of Indian origin and are managing the investment of offshore funds in various countries. These persons are not locating in India due to the above tax consequence in respect of income from the investments of offshore funds made in other jurisdictions.

In order to facilitate location of fund managers of off-shore funds in India a specific regime has been proposed in the Act in line with international best practices with the objective that, subject to fulfillment of certain conditions by the fund and the fund manager, -

(i) the tax liability in respect of income arising to the Fund from investment in India would be neutral to the fact as to whether the investment is made directly by the fund or through engagement of Fund manager located in India; and

(ii) that income of the fund from the investments outside India would not be taxable in India solely on the basis that the Fund management activity in respect of such investments have been undertaken through a fund manager located in India.”

There were thirteen conditions prescribed in section 9A (3) of the Income Tax Act 1961. Some further amendment was again made in the Budget 2016 to allay the concerns of the industry.

Nevertheless, it does not seem that many fund managers have moved to India. Now, another attempt is being made to woo them. This is what the FM said on this issue:

“So, the sixth one and the last one is over and above the two which were part of the ordinance. The sixth one is relaxation of conditions for eligible investment funds where an eligible fund manager relocates into India. So, this is a very interesting case because as per 9(2) of the income tax Act 2025 income is deemed to accrue or arise in India if it occurs or arises directly or indirectly through or from any asset or source of income in India or any property in India or any business connection in India or transfer of capital assets in situated in India. Now when all this is so completely India, there are cases where a fund operates outside but the fund manager is located in India . In order to exempt such cases, several conditions have been prescribed in respect of an eligible investment fund and also the fund manager. Presently there are 13 conditions for the eligible investment fund and four conditions for the fund manager. Some of these conditions stand relaxed in IFSA.

However, there have been persistent representations from the industry to rationalize the said conditions so that fund managers could relocate to India . So, schedule I of the Income Tax act of 2025 Sir, is proposed to be amended. So that's the amendment the sixth one to relax the conditions for being an eligible investment fund.

It has been proposed to reduce the number of such conditions from 13 at present to only five - five conditions to rationalize the said conditions. The proposed five condition are these:

So, what is the outcome that we expecting out of this sir? The amendment is expected to promote fund management activity in India. Sir, globally it is recognized Indians are exceptionally good in fund management. We want more of them to come reside in India and manage funds. Funds can be outside but if the fund manager comes to India, we are able to have better administration and more (uh) people who are very good in this field can get opportunities within India. So, the amendment is expected to promote fund management activity in India as it will enable relocation of fund managers to India. As I said, Indians have much expertise in fund management and it is expected that many fund managers of global funds will relocate to India in IFSC or also elsewhere in the country."

Relocation decision depends on many factors including lifestyle, infrastructure and many others. The latest bogey that one hears from experts is that India is the only country (amongst the competing jurisdictions) that charges capital gains on shares and there is now a clamour for exempting capital gains on shares transferred by non-residents. So, while wishing good luck to the FM on this issue, I remain sceptical of relocation of fund management and fund managers moving to India any time soon.

Dividend exemption to unit holders of business trusts from distribution made by an SPV .

Although not exclusively relating to non-residents, we may also note a consequential change made in the Act in respect of taxation of unitholders of a business Trust. The provision has been explained by the FM in her speech in the Rajya Sabha as follows:

"Sir, the fifth additional thing that we are bringing on is exemption to a unit holder on dividend received or receivable from a special purpose vehicle of business trust where such SPV is in new regime.

Sir, this is a very simplified one which I think all of us are aware of – we brought in the accumulated MAT which was in the old income tax regime- sort of a final tax and from now on we wouldn't collect MAP under the old regime, nor do we want to collect under the new regime. But, in order to exhaust the MAT or the MAT which has already got accumulated, we said companies will have to move over to the new tax regime. Now, when they move into the new tax regime with accumulated MAT which they would want to exhaust, they would have an SPV in the case of INVITs and so on- they would have an SPV. That's one thing which has happened through the Finance Bill. In the New Income Tax Regime Sir, we don't allow any exemptions, which is well known to everybody. But, because people are moving into the new regime with accumulated MAT, they have to exhaust it. Then, what happens? - Since they pass the dividend from their hand to the unit holder, because it's all units which come together- INVIT is a set of units- unit holder is an individual. When they pay the dividend in the new tax regime, this dividend receivers, unitholders will be subject to tax. So, that is inconsistent with the practice that existed in the old regime. So, when they have come here, to exhaust their MAT, if they are exhausting their MAP, the dividend payable, we are now exempting in the hands of the unitholder who is an individual. So, the SPV of a business trust may also have to move to the new tax regime either to avoid final MAT tax in the old regime or to avail accumulated MAT credit in the new regime, which is what I explained. So, this will lead to unitholders losing exemption on dividend income, which is why we are giving the exemption to the unitholder.

What would this be as an outcome? - The amendment is expected to further boost investments in real estate and infrastructure through business trust because, we are making it consistent.”

As explained in the FAQ 6- Business trusts are pass-through vehicles. They collect funds of unit holders and invest in real estate or infrastructure through a company (special purpose vehicle - SPV). The SPV pays tax on its profits and thereafter passes dividends to business trusts which is passed on to the unit holders. In the case of a business trust, dividend is exempt in the hands of a recipient unit holder only if SPV is taxable under the old tax regime . If the SPV is in the new tax regime, the exemption of dividends is not available to the unit holders. This is being changed. Consequently, Clause (b) of the Schedule V [Table: Sl. No. 5.D] is omitted to provide exemption on dividend received by a unit holder, even where SPV has exercised the option under section 200 of the Income-tax Act, 2025 to move to new tax regime.

Minimum Alternate Tax (MAT) reforms were introduced by the Finance Act, 2026. In accordance with the said provisions, amendments have been made in section206 of the Income-tax Act, 2025 (MAT provisions) so that MAT is final tax in the old regime and accumulated MAT credit can only be availed when a company shifts to the new tax regime .

These amendments were made to enable companies to move to the new tax regime. Therefore, SPV of a business trust may also have to move to the new tax regime either to avoid final MAT tax in the old regime or to avail accumulated MAT credit in the new regime. This will lead to unit holders losing the exemption on dividend income.

Accordingly, in order to provide certainty, an exemption has been given to dividend received by a unit holder, even where SPV has exercised the option under section 200 to move to the new tax regime.

At the same time, to compensate for the revenue loss on account of providing exemption to the unit holder where SPV is in new regime, an additional surcharge of fifteen percent on such SPV. Will be levied. 7

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1 https://www.slideshare.net/slideshow/report-task-groupdiamondsector11thfeb2013/28624097

2 Memorandum to the finance Bill, 2016

3 FM's reply, https://www.youtube.com/watch?v=L3vL1QKdLH0&t=1626s

4 https://www.incometaxindia.gov.in/w/schedule-iv-4

5 Need to formulate Special Notified Zones at Bharat Diamond & NBSP on 31 st July- https://indiankanoon.org/doc/130925498/

6 https://www.incometaxindia.gov.in/documents/d/guest/faqs_the_taxation_and_other_laws_amendment_bill_2026

7 ibid