Alternative Investments

unlocking potential for financial services

International Financial Services Centre (IFSC) is an initiative by the government of India (GoI) intended to encourage foreign capital to participate in India’s growth journey. This would allow financial institutions/fund managers to compete in the international market through a globally competitive platform offering varied financial products and services. Accordingly, Gujarat International Finance Tec-City (GIFT City), the first IFSC was set up in Gujarat in 2015. 

Why IFSC

IFSC provides an opportunity to global businesses to set up wide variety of business verticals in Banking, Insurance, Fund/Asset management, Capital Markets and Trading, IT services and ITeS/BPO services. Several tax and regulatory incentives have been accorded by GoI to business units established in IFSC in each of these segments.

One Regulator for Ease of Doing Business

Earlier the different business segments in IFSC were governed by different regulators namely Reserve Bank of India (RBI) for banking and capital market undertakings, Securities and Exchange Board of India (Sebi) for fund management and capital markets and Insurance and Regulatory Development Authority of India (IRDAI) for Insurance. Recognizing the need for co-ordination amongst all the regulators to ensure smooth business operations in IFSC, GoI established a unified regulator i.e., International Financial Service Centers Authority (IFSCA) under the IFSC Act to govern activities of all units established in IFSC.

IFSCA has been granted the necessary powers granted to Sebi, RBI, IRDAI, etc., to carry out its regulatory function for specified financial products and services. The specified financial products include bullion depository receipt with underlying bullion and bullion spot delivery contract whereas the specified financial services include trading in bullion depository receipts with underlying bullion in relation to bullion spot delivery contracts and provision of bullion financing.

Tax and Regulatory Advantage

To promote IFSC and to support migration of existing operations/setting up new operations in IFSC, the government has provided for certain tax and regulatory benefits to units set up in IFSC, including the following: 

 

  • Tax holiday to units set up in IFSC for income arising from business activities undertaken by such units for any 10 consecutive years out of a period of 15 years, beginning with the year in which the requisite permission for the operation of the IFSC unit was obtained.
  • Reduction in Minimum Alternate Tax (MAT) rate to 9% (instead of 15%) for a unit located in IFSC which derives income solely in convertible foreign exchange.
  • Reduction in withholding tax rate to 4% for certain interest income earned during specified period by non-residents from Indian companies or business trust
  • Exemption to non-residents from capital gain on account of transfer of specified securities listed on Recognized Stock Exchange in IFSC where the consideration on such transaction is paid or payable in foreign currency
  • No GST on services received by unit in IFSC and services provided to IFSC/SEZ units or offshore clients
  • Banking Units shall not be required to maintain Statutory Liquidity Ratio or Capital Reserve Ratio
  • No minimum capital requirement prescribed for Global In-house centres (GIC)
  • Exemption from certain eligibility norms in relation to registration of FPIs for applicants incorporated and established in IFSC.
  • Commodities transaction tax not leviable on trades executed on Commodity Stock Exchanges in IFSC
  • Stamp duty not chargeable in respect of instruments of transactions in Recognized Stock Exchanges and depositories established in IFSC
  • Several tax breaks provided to Aircraft leasing activity in IFSC and regulatory regime comparable to some of the overseas jurisdictions
  • Some of the specific tax incentives announced for alternative investment funds (AIF) and fund managers set-up in IFSC include:
  • Harmonizing tax rates applicable to FPIs with Category III AIF in IFSC
  • Exemption to certain specified income accruing to Category III AIF of which all units are held by non-residents other than units held by sponsor/manager
  • Exemption to non-resident investors of IFSC AIFs from obtaining PAN subject to certain conditions
  • Exemption to such non-resident investors from filing income tax return in India subject to certain conditions
  • Exemption to income accruing to non-resident investors from offshore investments made through Category I and II AIF
  • Recently, exemption/relation has been provided  to AIFs set-up in IFSC in relation to taking of leverage positions, non-applicability of investment concentration norms/diversification limits, permitting co-investments through segregated portfolio by issuing separate class of units, etc.
  • The Regulations now permit Indian entities to be the Sponsors of the AIFs in IFSC under the automatic route, subject to them meeting the prescribed conditions.
  • Fund managers migrating from overseas jurisdiction to IFSC, by setting up AIF, have been accorded regulatory relaxations under the AIF Regulations, namely relaxation in the requirement for sponsor/manager to maintain continuing interest in such AIFs and various tax benefits upon transfer of existing investments into the AIF.

Some areas require attention

While a lot has been done over the last few years to address the concerns of various stakeholders, there are few areas where some attention is required.  These include, there being lack of clarity on the substance requirements for setting-up unit in IFSC, absence of exemption on withholding on payment to units enjoying tax holiday benefit, etc. 

The Indian government and the regulatory agencies have been working in unison to enable IFSC for offering business and regulatory environment that is comparable to other leading IFCs.  The underlying objective is to make IFSC a global financial hub akin to the existing financial centers like London, New York, Hong Kong, Singapore, and Dubai. At present several banks, insurance companies and capital market intermediaries (including stockbrokers, custodians, depositories, AIFs, portfolio managers, investment advisors, etc.) have up their base in IFSC and many players are likely to join soon.

Further, in order to create a complete ecosystem of financial services in IFSC, the business support service providers are also being well supported by IFSCA and, as a result, a strong network of lawyers, consultants, trustees, and other service providers have set up or in the process of setting-up their operations in IFSC.

The approach to promote IFSC deserves appreciation with its success being evident with the significant spike in the number of players who have now set-up businesses in IFSC in India.  Hopefully, it is a matter of time, with right policy support, when Indian IFSC will be one of the prominent financial hubs for global transactions.

Vikas Vasal is national managing partner-tax at Grant Thornton Bharat LLP.

Amit Kedia and Hiten Ved contributed to this article.

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