Firms have to join in two years or forgo tax breaks
The Gujarat International Finance Tech (Gift) City, India’s pioneering international financial centre (IFC), is only taking shape but the government may limit the 10-year tax break for IFC units to the extant ones and units coming up in the next couple of years. The tax incentive for such centres, akin to those enjoyed by the special economic zones (SEZs) but governed by a separate provision (Section 80 LA) in the Income Tax Act, has been identified for phase-out as part of a larger plan to weed out tax exemptions that are a drain on the exchequer, according to official sources.
Gift City, a 50:50 joint venture between Gujarat Urban Development Company, a state government agency, and IL&FS, would traverse 886 acres of land. Land allotment for first phase of the project has been completed and construction of a World Trade Centre by Viridian RED and a business club and affordable housing project by the Hiranandani Group have just begun. Many global financial firms have also received Reserve Bank of India approvals for setting up shop here.
Under Section 80 LA, global banking and financial majors operating here would get full deduction of IFC profits from their taxable income for five years. The deduction would be of 50% of such profits for the subsequent five years.
The sheen of the Gift City project and its ability to attract global banks could be hit if the government phases out this exemption by introducing an end date/deadline after which no new institution setting up shop in an IFC would get the tax break, say experts.
When an end date for a tax break is introduced, those that start availing the incentive just before it would continue to get it for the remaining period.
Developing a financial hub in India, originally planned in Mumbai, has been a pet project for the finance ministry, especially the department of economic affairs, which was concerned about fund managers sitting in Singapore and Hong Kong offering Indian financial products to their global customers.
“Any phasing out of tax incentive to IFCs would affect their development and run counter to the government’s ambition to create financial hubs in India as an alternative to Singapore and Dubai. It would be prudent not to withdraw this benefit when India is being looked at as the top FDI destination,” said Rajiv Chugh, partner, EY.
Gift City, according to its developers, would be larger than such centres in London, Paris and Tokyo in terms of land area, construction size and green belt.
An expert panel had estimated in 2007 that the potential revenue stream for Indian IFCs could be in the range of 2% of all the trade and capital flows taking place across India’s borders. To tap that market, the government wants global banking giants to offer services such as fund raising, asset and risk management and treasury operations to their offshore clients from India.
Indicating this as a priority, finance minister Arun Jaitley had said in his 2015-16 Budget that Gift City in Gujarat was envisaged as an IFC that would actually become as good as Singapore or Dubai, which are largely manned by Indians. “The proposal has languished for years. I am glad to announce that the first phase of Gift will soon become a reality,” Jaitley had announced last February. Indian entities like Reliance Capital and MCX are in the process of setting up business in Gift City.
A final decision on phasing out the tax exemptions and its timing would be taken by Jaitley, who had announced it as a necessary measure for bringing down corporate tax rate from 30% to 25% in four years. Inclusive of cess and surcharge, the corporate tax rate is around 34%, but thanks to the sundry exemptions and other incentives, the effective tax rate is around 23% on average.