Introduction:
The Union Cabinet had approved the establishment of a unified authority for regulating all financial services in International Financial Services Centres (IFSCs) in India through International Financial Services Centres Authority Act, 2019.
The first IFSC in India has been set up at GIFT City, Gandhinagar, Gujarat. An IFSC enables bringing back the financial services and transactions that are currently carried out in offshore financial centers by Indian corporate entities and overseas branches / subsidiaries of financial institutions (FIs)to India by offering business and regulatory environment that is comparable to other leading international financial centers in the world like London and Singapore. It would provide Indian corporates easier access to global financial markets. IFSC would also compliment and promote further development of financial markets in India.
What is an IFSC and how does it work?
An International Financial Service Centre caters to customers outside the jurisdiction of the domestic economy. Such centres deal with flows of finance, financial products and services across borders. London, New York and Singapore can be counted as global financial centres. Many emerging IFSCs around the world, such as Shanghai and Dubai, are aspiring to play a global role in the years to come. An expert panel headed by former World Bank economist Percy Mistry submitted a report on making Mumbai an international financial centre in 2007. However, the global financial crisis that unfolded in 2008 made countries including India cautious about rapidly opening up their financial sectors.
What is GIFT City?
Gujarat International Finance Tech-city (GIFT) SEZ is India’s first International Financial Services Centre (IFSC) under Special Economic Zone Act, 2005 (“SEZ Act 2005”). It is being developed as a global financial services hub. GIFT IFSC is a Multi Services Special Economic Zone with 105 hectors of land and commenced its business in April 2015. GIFT City has been included in Government of India’s Smart City Mission Statement and Guidelines as Model City in Greenfield category for development of 100 Smart Cities in India.
GIFT City is an emerging global financial and IT services hub, a first of its kind in India, designed to be at or above par with globally benchmarked business districts. It is supported by state-of-the-art infrastructure encompassing all basic urban infrastructure elements along with an excellent external connectivity. Companies from Financial Services, Technology and all other services sector will be targeted as potential occupants within the city.
Benefits provided by the government:
- Stamp duty & registration / conversion fee exemption
- Construction subsidy of Rs. 300 per Sq.Ft. of BUA for vertical IT/ITeSParks
- Reimbursement of PF contribution by Employer
- Lease Rental Subsidy –INR 3 to INR 8 per Sq. Ft per month
- Reimbursement of Electricity Duty & Rs. 1 subsidy on tariff
- Capital subsidy for hardware, networking & related hardware upto INR 1 Cr.
- Support to Research and development Institutions
- Market Development Support to MSME
- Patent Assistance
Regulators for IFSCs:
Currently, the banking, capital markets and insurance sectors in IFSC are regulated by multiple regulators, i.e. RBI, SEBI and IRDAI. The dynamic nature of business in the IFSCs necessitates a high degree of inter-regulatory coordination. It also requires regular clarifications and frequent amendments in the existing regulations governing financial activities in IFSCs. The development of financial services and products in IFSCs would require focussed and dedicated regulatory interventions. Hence, a need is felt for having a unified financial regulator for IFSCs in India to provide world class regulatory environment to financial market participants. Further, this would also be essential from an ease of doing business perspective. The unified authority would also provide the much needed impetus to further development of IFSC in India in-sync with the global best practices.
Competitive Tax Regime in IFSC:
- Nil Tax:
- Security Transaction Tax (STT)
- Commodity Transaction Tax (CTT) ✓Dividend Distribution Tax (DDT)
- Long Term Capital Gain (LTCG)
- Short Term Capital Gain (STCG)
- Withholding Tax
- Good & Services Tax (GST)
- 10 years Tax holiday
- The Government has also exempted stamp duty for entities having registered office in GIFT for capital market activities
Income-tax:
- 100% tax exemption for 10 consecutive years out of 15 years
- MAT / AMT @ 9% of book profits applies to Company / others setup as a unit in IFSC. MAT not applicable to companies in IFSC opting for new tax regime
- Dividend income distributed by Company in IFSC is taxed in the hands of the shareholders.
Goods and Services Tax:
- No GST on services –
- received by unit in IFSC
- provided to IFSC / SEZ units or Offshore clients
- GST applicable on services provided to DTA
How is this tax regime beneficial for the investors?
- Interest income paid to non-residents:
- Monies lent to IFSC units not taxable
- Long Term Bonds & Rupee Denominated Bonds listed on IFSC exchanges taxable at lower rate of 4%
- Transfer of specified securities listed on IFSC exchanges by a non-resident or Category III AIF located in IFSC not treated as transfer - Gains accruing not chargeable to tax in India
- Specified securities include Bond, GDR, Foreign currency denominated bond, Rupee-denominated bond of an Indian company, Derivatives, Unit of a Mutual Fund, Unit of a business trust, Unit of Alternative Investment Fund and Foreign currency denominated equity share of a company
Grants by the Central Government : The Central Government may, after due appropriation made by Parliament by law in this behalf, make to the Authority grants of such sums of money as the Central Government may think fit for being utilized for the purposes of the Authority.
Transactions in foreign currency: The transactions of financial services in the IFSCs can be done in the foreign currency as specified by the Authority in consultation with the Central Govt.
Alternative Investment Funds in IFSC: In terms of the guidelines for setting up an Alternative Investment Fund (AIF) in IFSC as issued by SEBI (International Financial Services Centres) Guidelines, 2015 (IFSC Guidelines) and the operating guidelines dated November 26, 2018, the AIFs are being set up in GIFT-IFSC.
Subsequently, representations have been received from various stakeholders to review the framework so as to align it with international framework.
Leverage: An AIF in IFSC may borrow funds or engage in leveraging activities, subject to the following conditions:
- The maximum leverage by the AIF, along with the methodology for calculation of leverage, shall be disclosed in the placement memorandum;
- The leverage shall be exercised subject to consent of the investors;
- The AIF employing leverage shall have a comprehensive risk management framework appropriate to the size, complexity and risk profile of the fund.
Investments: An AIF in IFSC is permitted to:
- co-invest in a portfolio company through a segregated portfolio by issuing a separate class of units and shall ensure that:
- The investments by such segregated portfolios shall, in no circumstance, be on terms more favourable than those offered to the common portfolio of the AIF; and
- Appropriate disclosures have been made in the placement memorandum regarding creation of segregated portfolio; and
- invest in an AIF registered with SEBI in India, alongside other permissible investments.
The investment diversification requirements provided under regulation 15(1)(c) and 15(1)(d) of the SEBI (Alternative Investment Funds) Regulations, 2012, do not apply to AIFs in IFSC, subject to the conditions that appropriate disclosures have been made in the placement memorandum and the investments by AIFs are in line with the risk appetite of the investors.
Scheme for setting up of IFSC Banking Units (IBU) by Indian Banks:The Reserve Bank of India (RBI) had issued a notification under FEMA on March 02, 2015 setting out RBI regulations relating to financial institutions set up in International Financial Services Centres (IFSC).The regulatory and supervisory framework governing IBUs set up in IFSCs by Indian banks is detailed below:
Eligibility criteria: Indian banks viz. banks in the public sector and the private sector authorised to deal in foreign exchange will be eligible to set up IBUs. Each of the eligible banks would be permitted to establish only one IBU in each IFSC.
Licensing: Eligible banks interested in setting up IBUs will be required to obtain prior permission of the Reserve Bank for opening an IBU under Section 23 (1)(a) of the Banking Regulation Act, 1949 (BR Act). For most regulatory purposes, an IBU will be treated on par with a foreign branch of an Indian bank.
Capital: With a view to enabling IBUs to start their operations, the parent bank will be required to provide a minimum capital of US$ 20 million or equivalent in any foreign currency to its IBU. The IBU should maintain the minimum prescribed regulatory capital on an on-going basis as per regulations amended from time to time.
Reserve requirements: The liabilities of the IBU are exempt from both CRR and SLR requirements of Reserve Bank of India.
Resources and deployment: The sources for raising funds, including borrowing in foreign currency, will be per-sons not resident in India and deployment of the funds can be with both persons resident in India as well as persons not resident in India. However, the deployment of funds with persons resident in India shall be subject to the provisions of FEMA, 1999.
Permissible activities of IBUs: The IBUs will be permitted to engage in the form of business mentioned in Section 6(1) of the BR Act as given below, subject to the conditions, if any, of the licence issued to them.
Conclusion:
The establishment of a unified financial regulator for IFSCs has resulted in providing world-class regulatory environment to market participants from an ease of doing business perspective. This will provide a stimulus for further development of IFSCs in India and enable bringing back of financial services and transactions that are currently carried out in offshore financial centres to India. This would also generate significant employment in the IFSCs in particular as well as financial sector in India as a whole.
