Updated on July 18, 2023
The term “ring fence” refers to the concept of segregating certain income, transactions, or entities from others for tax purposes. It involves creating a separate tax regime or treatment for specific activities, isolating them from the overall tax system. The objective of ring-fencing is to establish distinct rules and regulations to achieve or successfully implement specific policy objectives.
Examples of ring-fencing
Ring-Fencing of Specified Incomes: In certain cases, tax laws may ring-fence specific types of income or transactions and subject them to separate tax treatment. For example:
a. Capital Gains on Sale of Securities: The income derived from the sale of listed equity shares or equity-oriented mutual funds is subject to a separate tax regime called the Securities Transaction Tax (STT). This tax is levied at the time of purchase or sale of such securities, and the gains or losses from these transactions are calculated separately from other income categories.
b. Special Tax Regime for Start-ups: The Indian government has introduced special tax provisions to support start-up companies. Start-ups meeting certain criteria may be eligible for tax exemptions or reduced tax rates under the provisions of the Income Tax Act. These provisions create a ring fence around start-up activities, providing them with specific tax benefits.
Ring Fencing of Tax Incentives: Similar to other jurisdictions, the Indian government introduces tax incentives to promote specific industries, regions, or activities. These incentives may be ring-fenced to ensure they are exclusively available to eligible taxpayers. For instance:
a. Tax Holiday for Special Economic Zones (SEZs): Indian tax laws provide a tax holiday to businesses operating in SEZs. These businesses enjoy a specific period of exemption from income tax on their profits earned from activities within the SEZ, creating a ring fence around the tax benefits for these entities.
b. Research and Development (R&D) Deductions: Indian tax laws provide additional deductions for eligible expenses incurred on scientific research and development activities. These deductions create a ring fence around R&D expenditure, allowing taxpayers engaged in R&D to avail themselves of specific tax benefits.