Gujarat International Fin-Tec City (“GIFT City”) is a global financial and IT services hub established under Special Economic Zone Act, 2005 (“SEZ Act”). Gift City includes ‘International Financial Services Centre’ (“IFSC”), which is a Special Economic Zone (“SEZ”) for financial services. IFSC aims to provide an easy access to global investors for establishing businesses in banking, insurance, capital market and asset and fund management. In addition to being a global hub for international transactions in finance and technology, IFSC in GIFT City will also act as a bridge between local businesses, international investors and technology leaders. In 2015 budget speech of Late Arun Jaitley (then Union Finance Minister), it was indicated that the GIFT City would be developed on the lines of international business centers in Singapore and Dubai.
To facilitate ease of doing business in IFSC, Government of India (“GoI”) has introduced comprehensive legal and regulatory reforms. IFSC Authority Act, 2019 (“IFSCA Act”) was enacted to provide for the establishment of IFSC Authority – a unified regulatory authority for banking, insurance, securities, and funds management sectors. IFSC Authority is mandated to develop and regulate the financial services market in IFSC. IFSC Authority headquartered at Gandhinagar, Gujarat has been notified by GoI on 27 April 2020.
Under IFSCA Act, IFSC Authority has been conferred with all statutory powers originally vested with Reserve Bank of India (“RBI”), Securities & Exchange Board of India (“SEBI”), Insurance Regulatory Development Authority of India (“IRDAI”) and Pension Fund Regulatory Development Authority of India (“PFRDAI”). This much awaited unified regulatory authority is expected to expedite the clearance process for establishment of new business units and approve innovative financial products in banking, insurance, capital markets and fund management sectors.
Incentives in IFSC:
GoI and Government of Gujarat have provided a slew of incentives to the entities setting up the GIFT City. These incentives range from exemption of registration fee and stamp duties to tax benefits. Details of the incentives are set out herein below:
a-> Fiscal incentives to IFSC units:
Units in IFSC:
- 100% tax exemption for 10 years out of 15 years
- IFSC Unit has the flexibility to select any 10 years out of 15 years block
- MAT / AMT @ 9% of book profits applies to Company / others setup as a unit in IFSC – MAT not applicable to companies in IFSC opting for new tax regime
- Dividend paid to shareholders of company in IFSC: From 01 April 2020, dividend income distributed by Company in IFSC to be taxed in the hands of the shareholder.
- Interest income paid to non-residents on: (i) Money lent to IFSC units not taxable. (ii) Long Term Bonds and Rupee Denominated Bonds listed on IFSC exchanges taxable at a lower rate of 4%
- Transfer of specified securities* listed on IFSC exchanges by a non-resident not treated as transfer – Gains accruing thereon not chargeable to tax in India
Goods and Services Tax (GST):
Units in IFSC:
- No GST on services: (i) received by unit in IFSC. (ii) provided to IFSC / SEZ units, Offshore clients.
- GST applicable on services provided to Domestic Tariff Area
- No GST on transactions carried out in IFSC exchanges
Other taxes and duties:
Units in IFSC:
- State Subsidies – Lease rental, PF contribution, electricity charges
- Exemption from Security Transaction Tax (STT), Commodity Transaction Tax (CTT), stamp duty in respect of transactions carries out on IFSC exchanges.
Exemption from currency control regulations to IFSC Units:
Under SEZ Act, a unit set up in IFSC is treated as a non-resident. Even under Foreign Exchange Management Act, 2002 (“FEMA”) units in IFSC enjoy the benefits of a non-resident under exchange control provisions.
Liberalized currency control regime for Indian residents:
Foreign Exchange Management (Transfer or Issue of any Foreign Security) Regulations, 2004 (“ODI Regulations”) restrict investment by an Indian resident into an overseas firm in the financial services sector. To enable, Indian residents to set-up and invest funds in GIFT City, RBI, vide its Circular dated May 12, 2021 has permitted sponsor contribution from a sponsor Indian party in an Alternative Investment Fund (AIF) established overseas, including IFSC.
Opportunities for Banking Sector in IFSC:
Indian banks and foreign banks can set up their business units in IFSC and can undertake following activities in IFSC:
- External Commercial Borrowing (ECB) loans to Indian borrowers. Indian borrowers may prefer loans from IBU because of physical proximity and because of known documentation.
- Buyers credit facilities to Indian borrowers: Pursuant to RBI directions, Indian branches of banks are not allowed to provide buyers credit facilities to the customers. However, since IBU is an offshore branch, it can provide buyers credit facilities to Indian borrowers.
- Foreign currency Loans to foreign companies.
- Foreign currency loans to entities registered in IFSC.
- Export bill discounting facility to Indian businesses.
- Financing Aircraft and ship leases and acquisitions.
- Open foreign currency current, savings accounts for Resident Individual and Non-Resident Individuals as per IFSCA Regulations.
- Foreign currency deposits from banks, corporates, or retail customers.
- Clearing and settlement activities for exchanges in IFSC.
- Professional clearing services.
- Custody services for securities (depository receipts) registered in IFSC.
- Less clarity on applicable law and jurisdictional courts in dispute resolutions.
- Competition from existing IFCs such as Dubai and Singapore.
- Evolving market practices and regulations.
This article was originally published in Mondaq.
As detailed above, IFSC in GIFT City provides various benefits to the entities setting up operations including liberal tax regime, currency control regulations, etc. With rapidly increasing list of activities like aircraft & ship acquisition, bullion exchange, stock exchange listing depository receipts of Indian companies, the government of India has made an effort to boost the development of IFSC. Given the size of Indian economy, there may be a lot of business potential in the IFSC. With tax holidays and single window clearance to all the businesses, IFSC might present a great value proposition to financial sector.