IFSC in India: GIFT-City

IFSC:

International Financial Service Centre (“IFSC”) is a hub of financial services within a territory which caters to deal with the flow of finance, financial products and services across borders outside the jurisdiction of the domestic economy. IFSC has been set up with the purpose of undertaking financial services transactions that are carried out outside India by overseas financial institutions or overseas branches/subsidiary of Indian Financial Institutions.

These services are being provided by various IFSCs located worldwide such as in London, New York, Singapore, Dubai, etc.

GIFT City SEZ - India's First IFSC:

The Hon’ble Finance Minister Mr. Arun Jaitley while presenting the Union Budget for the year 2015-16, announced the first IFSC in India, the Gujarat International Finance Tec-City (GIFT City). The following points listed below can provide a brief detail about the GIFT City IFSC:

The initial plan for the establishment of GIFT City was to attract Indian and foreign banks to open their offshore banking units.

• GIFT City consists of 2 zones- Special Economic Zones (SEZ) and Domestic Tariff Areas (DTA).
• GIFT City SEZ is a specified area, where units are set-up in order to carry out the manufacturing of specified goods and rendering of services like offshore banking, insurance, and other specified activities.
• Although, GIFT City is located in India, however, it is treated territory outside India. It allows people to invest in businesses located within the GIFT City.
• GIFT City acts as a tax-free investment destination in India where foreign investors and NRIs can invest in Indian markets through GIFT City. Also, AIFs have started to operate from GIFT City.
• The International Financial Services Centres Authority (IFSCA) has been established as a unified authority for regulating all the financial services in the IFSCs in India

Several fund managers are exploring GIFT City to establish alternative investment funds (“AIFs”).

Alternative Investment Fund means any fund incorporated in India which is a privately pooled investment vehicle which collects funds from sophisticated investors, whether Indian or foreign, for investing it in accordance with a defined investment policy for the benefit of its investors.

AIFs are bifurcated into the following categories:

• Category I: AIFs that invest in start-up or early-stage ventures and other sectors which the regulators consider as socially or economically desirable and shall include SME Funds, etc.
• Category II: AIFs that do not fall under the category of Category I & III and do not undertake leverage or borrowing other than to meet day-to-day operational requirements and as permitted in the SEBI. Category II includes real estate funds, private equity funds, etc.
• Category III: AIFs that employ diverse or complex trading strategies and may employ leverage through investment in listed or unlisted derivatives. Category III includes hedge funds, PIPE Funds, etc.

Tax Benefits in GIFT City:

Tax Holidays:

The units set up in IFSC will be allowed a 100% deduction from the gross total income of the business income of the units. Such deduction can be availed for any 10 consecutive years out of 15 years period, starting from the period when permission for the operation of units was obtained.

Reduced Minimum Alternate Tax (MAT):

A reduced rate of MAT @9% will be applicable on the units of IFSC where the whole of the income is earned in convertible foreign exchange.

Reduced Corporate Tax Rate:

The assessee can opt for the concessional corporate tax rate of 22% provided the deductions available under VI-A of the Act won’t be allowed. However, a certain exemption is allowed to the units of IFSC to avail the lower tax rate under this act without forgoing the deduction available u/s 80LA. Further, MAT provisions won’t be applicable on companies who opt for a concessional rate.

Computation of Total Income of Non-Residents (NR):

The deductions available under chapter VI-A are not allowed while computing the total income of Non-Residents. However, this provision won’t be applicable in case of deduction allowed to the units established in IFSC.

Capital Gains Tax:

Section 112A and 111A of the Act provides for concessional rate of rate of 10% and 15% on the capital gains arising on sale of specified securities subject to certain conditions, inter-alia, the transaction should be subject to the Securities Transaction Tax (STT). This condition has been relaxed where the transfer is undertaken on a recognized stock exchange located in any IFSC and the consideration for such transfer is received or receivable in foreign currency.

Capital gain tax on the transfer of certain specified securities listed on RSE in IFSC has also been exmpted. CBDT has notified such Specified securities as:

• foreign currency-denominated bond;
• unit of a Mutual Fund;
• unit of a business trust;
• foreign currency-denominated equity shares of a company;
• unit of AIF

Lower Withholding rate for certain income:

A lower withholding tax requirement of  4% on the interest income earned by non-residents by way of issue of any long-term bond or rupee denominated bond on or after the April 1, 2020 but before the July 1, 2023.

Dividend Distribution Tax Exempt:

When income is earned in convertible foreign exchange then no additional income tax would be payable on such income distributed on or after 1^st September 2019, by mutual funds, where such income is derived from RSE situated in IFSC.

ITR Filing and PAN:

Non-residents or Foreign company has been exempted from filing Income Tax Returns (ITR), having income from investing in Category I & II AIFs in IFSC, provided tax has been properly deducted and deposited to government by AIFs.

CBDT has also provide exemption to Non-residents or Foreign company having only income from investing in Category I & II AIFs in IFSC, from mandatory obtaining of Permanent Account Number (PAN). Provided tax u/s 194LBB has been duly withhold and deposited to government by IFSC AIFs and such non-resident or foreign company furnishes the specified details (like name, email ID, contact number, address in resident country etc.) to IFSC AIFs.

Others:

• Securities transaction tax /Commodities transaction tax are not leviable on IFSC units.
• Stamp duty not chargeable in respect of the instruments of transaction in RSE in IFSC.
• Exemption from Central Excise Duty, Customs Duty, Goods & Services Tax, Central Sales Tax, on the procurement of goods to carry out authorized operations.
• Exemption/ Reimbursement is available on Stamp Duty, Electrical Fees, Registration fees under the Gujarat State Industrial and IT Policy.

Budget 2023-24 proposal:

Union Budget 2023-24 announcement by Finance Minister Nirmala Sitharaman gives a major boost to GIFT City IFSC so as to make it competitive and comparable w.r.t. IFSCs in other countries. Below are the budget proposals made by Finance Minister via the Union budget:

Making a single window IT system for registration and approval from several regulators such as IFSCA, RBI, SBI, GSTN, IRDA for conducting seamless operations.

Facilitating acquisition financing by the units of foreign bank set up at the IFSC. This will help to cut cost of financing for outbound merger & acquisitions.

Offshore derivatives instruments are also known as Participatory Notes (P-Notes), are now recognized as valid contracts.

Encouraging sectors such as aircraft & ship financing activities through the establishment of subsidiary of (Export-Import) EXIM Bank at IFSC.

Proposal of setting-up of International Data Embassies in the GIFT City. The setting-up of data embassies at GIFT City would facilitate digital continuity solutions for countries seeking such solutions,

Amendment in statutory provisions of IFSCA Act, for arbitration, ancillary services, and avoiding dual regulations under SEZ.

Relocation of funds to IFSC:

Relocation of funds means a transfer of assets of the original fund, or of its wholly owned special purpose vehicle, to a resultant fund on or before March 31, 2025 where consideration for such transfer is discharged in the form of share or unit or interest in the resulting fund to:

• The stakeholders of the original fund in the same proportion in which the stakes were held by such persons in the original fund, in lieu of their holdings in the original fund; or
• The original fund, in the same proportion as referred above, in respect of which the stakes are not issued by the resultant fund to its stakeholders.

Taxation of Relocation of Off-Shore Funds to GIFT City:

• Exemption from capital gains tax on capital gains arising from transfer of shares of Indian companies and other Indian securities held by an offshore fund in a relocation by the fund to the IFSC AIF;
• Exemption from capital gains tax on capital gains arising from transfer by a shareholder/unit holder, in a relocation, of capital asset being share/unit held by him in the offshore fund in consideration for share/unit in the resultant fund;
• Cost of acquisition of shares of an Indian company acquired by the IFSC AIF upon the relocation is deemed to be the cost of the previous owner i.e., the cost base of shares of the Indian company in hands of the offshore fund is available to IFSC AIF;
• Cost of acquisition of units of the IFSC AIF acquired by the unit holders on the relocation of the offshore fund is deemed to be the cost of the previous owner;
• The period of holding of shares of an Indian company acquired by the IFSC AIF upon the relocation is deemed to be include the period for which the shares of the Indian company were held by the offshore fund. This will provide higher benefit of indexation to the AIF upon the transfer of the shares;
• The period of holding of units of IFSC AIF acquired by the unit holders upon the relocation is deemed to include the period for which such unit holders held the units of the offshore fund. This will provide a higher benefit of indexation to the unit holders upon the transfer of the units;
• The Indian company has been allowed the benefit of set off and carry forward of loss to the extent the change in shareholding has taken place on account of relocation;
• Lastly, corresponding changes have also been made to the provisions of taxation of gifts to ensure that the IFSC AIF or the unit holders of the offshore fund are not subject to tax on account of the swap transaction.

Comparison with the Off-Shore Funds outside India                             

Note: This comparison is not exhaustive and there may be additional benefits or differences not included in this table.