Introduction:

An IFSC deliberately provides Indian corporates with easier access to global financial markets, and to complement and promote further development of financial markets in India. The financial services and transactions that are presently administered in offshore financial centres by Indian corporate entities and overseas branches or subsidiaries of Monetary Institutions like banks, insurance companies, etc. to India will be brought back by an IFSC. This is done by providing a business and regulatory environment compared to other leading international financial centres in the world like London and Singapore.

It will conduct business in such foreign currency and with such entities, whether resident or non­resident. International Financial Services Centres Authority was established by the central government to regulate all financial services in International Financial Services Centres (IFSC) with the headquarters in Gandhinagar (Gujarat). Gujarat International Finance Tech-city (GIFT)1 SEZ is India’s first International Financial Services Centre (IFSC) under Special Economic Zone Act, 2005 (“SEZ Act 2005”). It is being developed as a global financial services hub. GIFT IFSC is a Multi Services Special Economic Zone with 105 hectors of land and commenced its business in April 2015. The Union Budget 2016 provided competitive tax regime for the IFSC at GIFT SEZ. It is the vision of the Hon’ble Prime Minister that GIFT IFSC emerges as a hub for international financial services activities.

International Financial Services Centre (IFSC):

♦ An IFSC caters to customers outside the jurisdiction of the domestic economy. Such centres deal with flows of finance, financial products and services across borders. London, New York and Singapore can be counted as global financial centres. Many emerging IFSCs around the world, such as Shanghai and Dubai, are aspiring to play a global role in the years to come.

♦ An expert panel headed by former World Bank economist Mr. Percy Mistry submitted a report on making Mumbai an international financial centre in 2007. However, the global financial crisis that unfolded in 2008 made countries including India cautious about rapidly opening up their financial sectors.

♦ The Hon’ble Finance Minister Arun Jaitley, had announced in the Union Budget 2015 that India’s first IFSC’s would be set up in GIFT City in Gujarat.

♦ Gujarat International Finance Tec-City (GIFT City) is the country’s first IFSC, with which top bourses BSE and NSE signed MOUs for setting up International exchanges there. However, BSE already started India International exchange on January 9, 2017.

The services rendered in IFSC:

1. Fund-raising services for individuals, corporations and governments

2. Asset management and global portfolio diversification undertaken by pension funds, insurance companies and mutual funds.

3. Wealth management.

4. Global tax management and cross-border tax liability optimization, which provides a business opportunity for financial intermediaries, accountants and law firms.

5. Global and regional corporate treasury management operations that involve fund-raising, liquidity investment and management and asset-liability matching

6. Risk management operations such as insurance and reinsurance.

7. Merger and acquisition activities among trans-national corporations

IFSC in SEZ2:

♦ Definition of IFSC as per SEZ Act: As per Section 2 (q) of SEZ Act, 2005, “International Financial Services Centres” means an International Financial Services Centre which has been approved by the Central Government under sub-section (1) of Section 18 of SEZ Act, 2005. As per Sub section (1) of Section 18 of SEZ Act, 2005, The Central Government may approve the setting up of an International Financial Service Centre in a Special Economic Zone and may prescribe the requirements for setting up and operation of such centre. Provided that the Central Government shall approve only one International Financial Services Centre in a Special Economic Zone.

♦ As per Sub section (2) of Section 18 of SEZ Act, 2005, The Central Government may, subject to such guidelines as may be framed by the Reserve Bank, the Securities and Exchange Board of India, the Insurance Regulatory and Development Authority and such other concerned authorities, as it deems fit, prescribe the requirements for setting up and the terms and conditions of the operation of Units in an International Financial Services Centre. Accordingly, Securities board of India has recently issued guidelines dated 27.03.2015 named as SEBI (International Financial Services Centres) Guidelines, 2015

♦ SEBI (International Financial Service Centres) Guidelines, 2015 has been issued to facilitate and regulate financial services relating to securities market in an International Financial Services Centre set up under section 18 (1) of SEZ Act, 2005. Such guidelines will facilitate setting up and operations of units in country’s first IFSC at GIFT City, Gujarat. SEBI (International Financial Service Centres) Guidelines, 2015 shall come into force w.e.f April 01, 2015

♦ RBI would permit the setting up of IFSC Banking units (IBUs) in International Financial Services Centres (IFSC) by banks in accordance with RBI regulations relating to Financial Institutions issued vide notification no. FEMA.339/2015 – RB dated March 02, 20153.

♦ IRDA of India would allow Life and Non-life Insurance services, health Insurance services and reinsurance services to set up a branch in IFSC. Such guidelines would be referred to as Insurance Regulatory and Development Authority of India (International Financial Services Centre) Guidelines, 2015.

♦ Insurance Regulatory and Development Authority of India (International Financial Services Centre) Guidelines, 2015 came into force w.e.f. April 06, 2015.

Gujarat International Finance Tec-City (GIFT) -A Global Financial & IT Hub

GIFT City is an integrated development on 886 acres of land with 62 mn sq. ft. of Built Up area which includes Office spaces, Residential Apartments, Schools, Hospital, Hotels, Clubs, Retail and various Recreational facilities, which makes this City a truly “Walk to Work” City. GIFT City consist of a conducive Multi-Service SEZ (Special Economic Zone) and an exclusive Domestic Area. This City is a Vertical City which will optimize land area consumption for development. The City is located on the bank of river Sabarmati connecting the Business capital (Ahmedabad) and Political capital (Gandhinagar) of Gujarat State- The Growth Engine of India. GIFT City might be the new Financial & Technology Gateway of India for the World.

The promoting entities of GIFT City

The promoting entities4 of GIFT city are:

Gujarat Urban Development Company Limited (GUDCL)

GUDCL is the designated agency of Government of Gujarat to facilitate urban development by assisting state government and other agencies in formulation of policy, institutional capacity building, project implementation; to assist in raising funds from multilateral agencies for various projects to facilitate sustainable development of urban areas, both new and existing, in order to achieve high living standards and growth of economic activities.

Infrastructure Leasing and Financial Services Ltd (IL&FS)

Incorporated in 1987, the business architecture of IL&FS focuses on providing services in development of Core Infrastructure. Areas suitably complemented with an array of Financial Services. The various businesses are conducted through subsidiaries with IL&FS being a principal shareholder in each.

IL&FS has been promoted by the Central Bank of India (CBI), Housing Development Finance Corporation Limited (HDFC) and Unit Trust of India (UTI). Over the years, IL&FS has broad-based its shareholding and inducted Institutional shareholders including State Bank of India, Life Insurance Corporation of India, ORIX Corporation, Japan and Abu Dhabi Investment Authority. Indirect tx in

Tax, Fiscal Incentives and Economic benefits available under SEZ Act 2005 for IFSC units5:

Since India has many restrictions on the financial sector, such as partial capital account convertibility, high SLR (statutory liquidity ratio) requirements and foreign investment restrictions, an SEZ can serve as a testing ground for financial sector reforms before they are rolled out in the entire nation.

Tax on long term capital gains in certain cases

Where the transfer takes place through a recognized stock exchange located in the IFSC, the provisions of section 112A shall not apply. Section 10(38) provides exemption from long term capital gain on transfer of equity shares or units of equity-oriented funds or units of business trust on which securities transaction tax is paid. Proviso to section 10(38) provides the where the transaction is undertaken on a stock exchange situated in IFSC, the LTCG shall be exempt even though STT is not paid.

Tax on short term capital gains in certain cases

Proviso to section 111A provides that the where the transaction is undertaken on a stock exchange situated in an IFSC, the STCG shall be taxable at the rate of 15% even though STT is not paid.

One additional condition is that the consideration for such transaction shall be paid or payable in foreign currency.

Tax on distributed profits of domestic Companies.

The provisions of Section 115-O shall not be applicable to units located in the IFSC. Since, DDT is not available for set off against the normal income tax payable by a Company, it becomes an additional cost to the Companies. Hence, the units located in IFSC enjoy tax concession to the extent of 20.555% on dividends distributed, declared or paid.

Deductions in respect of certain incomes of Offshore Banking Units and International Financial Services Centre.

Section 80LA provides income-based deductions for units located in an IFSC from payment of income tax. The exemption shall be as under:

i) 100% deduction for the first five consecutive years beginning from the year in which permission from the respective regulatory authority was obtained.

ii)50% deduction for the next five consecutive financial years.

Special provision for payment of tax by companies

For a Company located in IFSC, the provisions of section 115JB shall be as follows:

where the TAX on the total income is less than 9% of the Book Profit (as computed in accordance with the provisions of section 115JB), then the Company shall instead of paying tax as per the normal provision, pay tax @ 9% of the Book Profit.

Special provisions for payment of tax by certain persons other than a company.

For an assessee other than a Company located in IFSC, the provisions of section 115JC shall be as follows:

where the TAX on the total income is less than 9% of the Adjusted total Income (as computed in accordance with the provisions of section 115JC), then the assessee shall instead of paying tax as per the normal provision, pay tax @ 9% of the Adjusted Total Income.

Transactions not regarded as transfer

Under Section 47, any transfer of Capital Asset being,

i) Bond or Global Depository Receipt

ii)Rupee denominated bond of an Indian company

iii) Derivative

made by a non-resident on a recognized stock exchange located in any International Financial Services Centre and where the consideration for such transaction is paid or payable in foreign currency is not considered as a transfer and hence not liable to Capital Gain Tax.

Exemption as per SEZ Act, 2005

Apart from SEZ related incentives as per the SEZ Act, 2005 there is an exemption from the securities transaction tax leviable under section 98 of the Finance (No. 2) Act, 2004 in case the taxable securities transactions are entered into by a non-resident through the International Financial Services Centre;

Indirect Tax incentives announced in Union Budget 2016

Incentives Conditions Remarks
Customs duty Exemption from customs duty for all goods imported into the SEZ used for authorized operations Any removal of goods from SEZ into DTA would attract Customs duty
Central excise

duty

Exemption from duty of excise on domestic procurement to carry authorized operations Removal of goods into DTA liable to customs duty
Drawback Drawback and such other benefits on goods brought Goods supplied to SEZ regarded as export for customs purpose
Deemed export Supply of goods or services by an EOU unit or STPI unit regarded as export FTP regards supply to SEZ as export of goods or services
Service Tax Exemption from service tax on services procured by the SEZ unit used for authorized operations Entails compliances as prescribed under the relevant notification
CST Exemption from CST on inter-state procurement of goods used for authorized operations Entails compliance of issuing Form I by the SEZ unit to the supplier of goods
Electricity duty/Stamp duty/Registration fees Exemptions/reimbursements under the Gujarat State Industrial and IT policy New IT policy introduced in February 2016

A comparison of Tax and Fiscal incentives between SEZ Unites and IFSC Units

Particulars SEZ Units IFSC Units
During Development, Construction and Operation Stage Exemption from: Exemption from:
Exemption from:

Custom Duty & Excise Duty Central Sales Tax Service Tax Exemption from VAT, Stamp duty etc. as per State Govt. Policy

Exemption from:

Custom Duty & Excise Duty Central Sales Tax Service Tax Exemption from Securities transaction tax leviable under sec. 98 of Finance (No. 2) Act, 2004, Commodity Transaction Tax, Long Term capital gain tax and Dividend distribution tax Exemption from VAT, Stamp duty etc. as per State Govt. Policy

Income Tax Holidays For First 5 years- 100% of eligible profits or gains. For Next 5 years- 50% of eligible profits or gains. For Next 5 years- 50% of the ploughed back export profits (Exemption as per Section 10AA -There is a sunset clause for SEZ units i.e. 31.03.2020) For First 5 years- 100% of eligible profits or gains. For Next 5 years- 50% of eligible profits or gains. (Exemption U/s. 80LA -No sunset clause)
MAT MAT is applicable at the rate of 18.5% (Surcharge, cess extra) MAT is applicable at the rate
of 9% (As per Union Budget
2016)- Surcharge, cess extra

Why consider AIFs in GIFT City?

Setting up of Alternative Investment Funds (AIFs) in GIFT City, being the species of private pooled funds recognized in India, becomes another important step in proliferation of financial and capital market activities.

Further operational and regulatory clarifications for stakeholders waiting to set up AIFs in GIFT City, the circular titled ‘Operating Guidelines for Alternative Investment Funds in International Financial Services Centres’ dated 26 November, 2018 (AIFs in IFSC Guidelines) by SEBI6, provided much needed clarity on several aspects with respects to setting up and operation of AIFs in GIFT City.

1. Continued applicability of the SEBI (AIF) Regulations, 2012 – the AIFs in IFSC Guidelines work under the broad ambit of the SEBI (AIF) Regulations, 2012 (the AIF Regulations7). Thus, all provisions of the AIF Regulations and the circulars issued thereunder, will also apply to AIFs set-up in GIFT City, and also to the investment managers, sponsors, and investors. This would include periodic reporting, event-based reporting, adherence to disclosure norms to SEBI.

2. AIFs in IFSC are considered offshore entities – RBI, in its Foreign Exchange Management (International Financial Services Centres) Regulations, 2015 dated 02 March, 2015 has stated that any financial institution or branch of a financial institution set up in the IFSC and permitted/recognized as such by a regulatory authority shall be treated as a person resident outside India. Therefore, under FEMA, the transactions with Indian residents or making investments in Indian securities would require compliance with FEMA norms.

3. No separate registration process – The conditions as applicable to domestic AIFs for registration with SEBI, will continue to apply to AIFs in GIFT City as well.

4. Operating Currency – AIFs operating in IFSCs can accept money only in foreign currency.

5. Eligible Investors – A person resident outside India, NRIs, Indian institutional investor permitted under FEMA invest funds offshore, Indian resident having net worth of at-least USD 1 Million during the preceding financial year (subject to limits under Limited Remittance Scheme of RBI). It would be beneficial if the guidelines clarify, whether investment by Indian residents into the AIF set up in GIFT City, which further invests into Indian companies, is considered as round-tripping.

6. Investible Securities – AIFs in GIFT City can only invest in securities that are; listed in IFSC; issued by companies incorporated in IFSCs; or issued by companies incorporated in India or companies belonging to a foreign jurisdiction.

7. Investment Route – Earlier, such AIFs in IFSCs could only invest in India through the FPI route. Now, such AIFs may invest in India through the FDI or Foreign Venture Capital Investor (FVCI) route as well.

The other Economic advantages includes:

1. Gujarat International Finance Tec-City (GIFT), as the smart city is called, will double up as a financial hub, with tax and other breaks to lure banks, brokerages and other businesses.

2. The city will use the energy-efficient district cooling system instead of air-conditioning.

3. It will also use an automated waste collection system that sucks away garbage from buildings at high speed, meticulously planned metropolis complete with gleaming towers, drinking water on tap.

4. The GIFT city project aims at state-of-the-art internal infrastructure encompassing all basic urban infrastructure elements along with an excellent external connectivity by roads, metro rail and Bus Rapid Transport Service.

5. GIFT has the advantage of being flanked by a river on one side and a national highway on the other, and also sits between Gujarat’s capital of Gandhinagar and its business hub of Ahmedabad, with a large international airport.

Conclusion:

The GIFT city is progressing slowly and steadily. On one front, despite efforts by the Hon’ble Modi government over the past few years to offer tax and regulatory concessions, and a big push to get banks and brokerages into GIFT, the project remains far short of expectations. GIFT’s future is uncertain, with its main partner in financial trouble over soured bets in other projects. But on another front given its great economic, tax and fiscal advantages GIFT city can boost foreign investors in India. As a brainchild of Hon’ble Prime Minister Narendra Modi, it is India’s first operational smart city and international financial services centre (IFSC). It has made a good start and shows early promise but significant challenges and it envisages a global financial hub on the lines of Singapore, London and Dubai that will offer stiff competition to these cities.

Notes:-

1 https://www.longfinance.net/media/documents/Focus_On_GIFT_City_2020__v2.0.pdf

2 https://www.indiainx.com/download/IFSC_Regulations_and_Guidelines.pdf

3 https://www.rbi.org.in/SCRIPTs/NotificationUser.aspx?Id=9619&Mode=0

4 http://www.giftsez.com/documents/FAQS-GIFT-City-IFSC.pdf

5 https://www.indiainx.com/download/IFSC_Regulations_and_Guidelines.pdf

6 https://www.sebi.gov.in/legal/circulars/nov-2018/operating-guidelines-for-alternative-investment-funds-in-international-financial-services-centres_41070.html

7 https://www.sebi.gov.in/legal/circulars/nov-2018/operating-guidelines-for-alternative-investment-funds-in-international-financial-services-centres_41070.html

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