Budget 2018: In January 2017, PM Modi inaugurated India’s first international exchange—India INX—at the International Financial Services Centre (IFSC) within Gujarat International Finance Tec-City (GIFT) in Gandhinagar. Several successful offshore financial centres offer very low tax rates that attract MNCs to set up businesses. To provide a level-playing field to the Indian IFSC in GIFT, in the previous Budgets the government provided certain relief measures to units set up in Indian IFSC such as removal of STT for transactions undertaken on IFSC exchange, exemption from DDT, etc. The finance minister, in his Budget speech, proposed path-breaking concessions for the Indian IFSC, so that it does not merely remain a concept on paper, but is established in its true spirit.
SEBI’s ban last year on P-Notes from taking naked derivative positions in the Indian market created concerns that futures trading on Indian stocks may move to offshore exchanges such as Singapore Exchange. To restrain this and promote development of IFSC in India, the Budget has provided that transactions in derivatives, bonds, global depository receipts and rupee bonds—by a non-resident on an IFSC exchange—will be exempt from capital gains tax in India.
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The government has also taken an initiative of inviting to Indian shores derivative trades in non-Indian securities, which are being undertaken outside India. While the income from trading of aforesaid specified securities shall be exempt from tax, foreign investors expect exemption from Indian compliances such as filing of tax return. The current tax regime provides for a 10-year tax holiday to units set up in an IFSC (100% of tax for the first five years and 50% of the tax for balance five years). In the past, the government provided a concessional alternate minimum tax (AMT) of 9% (as against normal AMT of 18.5%) to corporate units set up in an IFSC. This concessional AMT rate of 9% has been extended even to non-corporate units set up in an IFSC.
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Indian IFSC needs a coherent regulatory framework to fully develop and to compete with other offshore IFSCs like Dubai and Singapore. Considering this, the finance minister has announced that the government will establish a unified authority for regulating all financial services in an IFSC. While investors waited with bated breath for these concessions, relief is still expected on withholding tax on interest income from rupee-denominated bonds issued in the IFSC (current tax rate of 5%) and extension of the tax holiday period for units set up in the IFSC similar to its global counterparts.
The introduction of the IFSC concept was a bold move—one that can position India as a financial hub, alongside Dubai, Singapore, Hong Kong, etc. Barring certain minor creases in the extant tax framework that still need to be ironed out, we applaud the manner in which the government and regulatory bodies (RBI, SEBI, IRDA) have worked seamlessly and in synchrony over the last couple of years to ensure that IFSC in India is successfully implemented and becomes at par with global counterparts in the near future. (Nidhi Vyas, senior tax professional, contributed to the article)
Tax Partner, Financial Services, EY India.
Views are personal