The finance ministry is exploring the possibility of setting up special economic zones from where global financial institutions can freely provide services to domestic and overseas customers, unhindered by India’s current regulatory system that does not permit unlimited cross-border exchange of capital.
In a report released by the ministry for public consultation, National Institute of Public Finance and Policy (NIPFP) made a case for creating finance SEZs that will act as tax-free and liberally regulated enclaves within India where global financial firms could open units and manage their worldwide business. It would also enable the zones to compete with financial nerve-centres such as New York, London and Singapore.
The ministry had in 2007 considered a plan to ease regulations so as to make Mumbai an international financial centre, but the 2008 economic crisis shifted policymakers’ attention from opening up the system to tighter regulation. NIPFP report says the original objective remains the long term goal, but a beginning towards that could be made by allowing setting up of finance SEZs.
Besides the issue of capital control, one of the areas where changes in law would be required is India’s present system of residence-based taxation. Any income or capital gain arising from managing overseas investors’ assets in another country should not be taxable in India solely by virtue of the asset manager’s residence status in India. “Finance SEZs should have modern regulation, so that product bans and restrictions that bedevil the Indian financial system are not a bottleneck,” said the report.
Just like exemption from excise duty given to SEZs, entities inside a financial SEZ should be exempt from securities transaction tax, commodities transaction tax and service tax, argued the report.
When an Indian firm raises equity and debt capital in UK or Singapore, financial services revenues associated with it accrue to those economies. Salaries and tax payments take place in those countries. To the extent that finance SEZs in India are able to compete for this business, the salaries and tax payments would stay in India, said the report.