Budget 2023: GIFT City gaining momentum for Investment Funds courtesy favorable tax and regulatory regime

There are some aspects where further clarification and relaxations are sought by the industry participants to make the GIFT City even more attractive.

GIFT City gaining momentum for Investment Funds courtesy favorable tax and regulatory regime
One area of concern is with respect to clarity in terms of characterisation of carried interest earned by the sponsor entity, which would make sponsor contribution to the Fund.

Gujarat International Finance Tech City (“GIFT City”) is leading its way India’s gateway for inbound and outbound requirements of the international financial services. The Government has taken various steps to make GIFT City a global hub for financial services by introducing various tax and regulatory incentives to enable offshore Fund Managers to set up units in the GIFT City.

Ever since the establishment of a unified regulator, i.e., the International Financial Services Centres Authority (IFSCA) in April 2020, GIFT City has seen major traction amongst the Fund Managers and other service providers. The IFSCA is vested with the regulatory powers of four financial services regulators in India, namely, RBI, SEBI, IRDAI and PFRDAI. IFSCA has taken major steps to spread the ecosystem in the GIFT city across multiple activities – Fund Managers, Stock Brokers, Banks, Custodians, Trustees, Registrar and Transfer Agent as well as other activities such as Global in House Centre, Ship leasing, Aircraft leasing and finance, Bullion Exchange, etc.

The special tax regime provided for businesses setting up presence in the GIFT city and the active role of regulator in simplification of regulatory norms has attracted the interests of global businesses.

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In order to create a tax regime which is attractive to offshore Funds investing in India through popular asset management hubs like Singapore and Mauritius, the Government has introduced various tax incentives for Funds set-up in GIFT City. In 2019, the Government introduced tax exemption for all non-equity capital gains such as debt securities, derivatives, units of business trust, etc. earned by the GIFT city Funds. Further, concessional tax rate is provided for income earned from investments made by such Funds.

The Government also introduced a tax holiday of 100% of the profits earned by the Fund Management Entity (“FME”) for 10 consecutive years out of first 15 years. Goods and Services Tax (“GST”) is also not applicable on the management fees/ variable fees charged by the FME to the Funds in IFSC. Further, no stamp duty, Securities Transaction Tax or Commodity Transaction Tax is applicable on transactions carried out on the IFSC exchanges. Further, since the GIFT City Funds are not claiming any tax treaty benefits, anti-avoidance rules are not applicable to them, especially provisions relating to BEPS and MLI.

From a regulatory perspective, Fund Managers in GIFT City can obtain a single unified registration for multiple activities, thereby undertaking host of activities related to fund management under a single unified registration from IFSCA. Further, investment diversification norms are not applicable to Funds set-up in GIFT City. They can also undertake leverage without any limits and invest in physical assets such as real estate, bullion, art, etc. This is in line with global best practices.

All the aforesaid initiatives, coupled with reduced compliance requirements have resulted in increasing interest of the Fund Managers to set-up presence in GIFT City. Till date, more than 30 Funds have already set-up presence in the GIFT City, with many more in pipeline. Further, there are approx. 3 stock exchanges, 21 banks, 64 brokers, 5 custodians and 36 ancillary service providers registered in GIFT City.

There are, however, some aspects where further clarification/ relaxations are sought by the industry participants, to make the GIFT City even more attractive. While GIFT City offers lower tax rate for income from securities (i.e. dividend, interest income) earned by the Funds, these tax rates are still higher than the rates available in some of the tax treaties such as Mauritius, Hong Kong, France, Luxembourg, Ireland, Norway, etc., if the surcharge on income-tax is also considered. Even for capital gains and other income, surcharge applicable to the GIFT City Funds may be higher than the surcharge rate applicable to Offshore Funds set-up under a corporate structure, which creates tax arbitrage.

Thus, there is a need to further reduce the tax rates income from securities as well as on capital gains. This could particularly be helpful for debt Funds, where difference in tax rate on interest income between, say, Mauritius Fund and GIFT City Fund could be upto 6.75%.

Another area of concern is with respect to clarity in terms of characterisation of carried interest earned by the sponsor entity, which would make sponsor contribution to the Fund. The tax laws have no specific provision which characterizes such carried interest as “capital gains” or “business income”, which leads to ambiguity in taxation of the carried interest.

The Government should also aim to reducing compliance burden on the FME and the Funds set-up in GIFT City. The FME and the Funds should be required to make a uniform regulatory filing with the GIFT authorities, instead of multiple filings with the GIFT as well as the SEZ authorities. Also, exemption should be provided from requirement to furnish Form 15CA/ 15CB for effecting each distribution to the non-resident investors and lenders.

GIFT City also permits FME in GIFT City to pool money from resident investors and invest in foreign securities. There are, however, no tax exemptions provided to the Funds set-up in GIFT City. Even if no exemptions are envisaged for these Funds, clarity should be provided in terms of characterisation of income earned by the Funds and the taxation mechanism of the income earned by the Funds.

The GIFT City regime has seen tremendous interest amongst the Indian as well as Foreign Fund Managers and will continue to attract more fund managers wanting to setup structures for inbound and outbound investments. Clarity on some of these tax aspects will therefore be welcome and will enable GIFT city funds to function smoothly.

(By Rajesh H. Gandhi, Partner, Deloitte India; Vijay Morarka, Senior Manager and Hardik Mehta, Manager, Deloitte Haskins and Sells LLP India)

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First published on: 27-01-2023 at 13:34 IST