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GIFT IFSC has gained a lot of attention since its inception and Budget 2023 announcements have made it more attractive.
In brief
- Union Budget 2023 has empowered GIFT IFSC by delegating the registration/approval power that earlier lied with SEZ authorities to the IFSCA.
- A single-window registration system will simplify the approval process and boost ease of doing business.
- ODIs issued by FPI and regulated by IFSCA will be considered as valid and legal contracts.
- The GIFT IFSC's allowance of acquisition financing by IBUs of foreign banks could create a new avenue for business opportunities for these banks.
India’s progress over the last decade has been remarkable. Indian economy is set to achieve the US$ 5 trillion vision set by the Hon’ble Prime Minister fairly soon. As per EY’s Report[1], India is expected to achieve rapid growth and in next 25 years, the economy is likely to achieve a size of USD 26 trillion by the year 2047.
The Government of India (GoI) recognises that in a globalized world, global capital will act as an important driver of economic growth and a strong Financial Sector would be a key constituent in India’s growth story. GIFT IFSC (Gujarat International Finance Tec-City - International Financial Services Centre), India’s first International Financial Services Centre (IFSC) launched in 2015, is expected to play a pivotal role in this journey by tapping global capital flows to meet India’s development needs and provide a globally competitive financial platform for the full range of international financial services.
One of the many advantages of GIFT IFSC (located between Gandhinagar and Ahmedabad) is that it houses India’s first International Financial Services Centre (IFSC), which enables registered entities to operate, innovate and succeed, facilitated by an internationally comparable regulatory framework under a special offshore status within India. It is already ranked third by the Global Financial Centres Index[2] as one of the 15 centers that is likely to become more significant in the next few years.
The GIFT IFSC has captured the imagination of the financial services industry since the constitution of International Financial Services Centre Authority (IFSCA) in 2020, the unified regulator for financial institutions, products and services at GIFT IFSC, with a special focus on the ease of doing business. The Government of India (GoI) also provides several fiscal incentives with a view to encourage businesses to be set up in GIFT IFSC. These include:
- Income tax holiday for 10 continuous years (out of 15 years) for units set up in GIFT IFSC
- Favourable taxation regime for funds set-up in GIFT IFSC comparable to the treaty jurisdictions, such as Singapore/ Mauritius
As testimony to the efforts of the IFSCA and GoI, the volume of business activities in GIFT IFSC has seen notable growth across various sub-sectors of financial services. (See Table for details)
Union Budget 2023 announcements
The Hon’ble Finance Minister in her Budget speech made some key policy announcements for further enhancing growth and development of GIFT IFSC’s ecosystem. An overview and impact of the announcements are discussed below:
Powers under the Special Economic Zone (SEZ) Act, 2005 to be delegated to IFSCA
Entities in GIFT IFSC are currently required to obtain registration/ approval from the SEZ authorities, prior to seeking approval from IFSCA. With an object of further enhancing ease of doing business, it is proposed that the powers of the SEZ authorities in the GIFT IFSC zone shall be delegated to IFSCA. This further strengthens the power of IFSCA as a unified Financial Services regulator for GIFT IFSC.
Single-window IT system to be set-up for registration and approval from IFSCA, SEZ authorities, GSTN, RBI, SEBI and IRDAI[3]
A single-window registration, which also extends to RBI, SEBI and IRDA may provide a significant boost to ease of doing business in GIFT IFSC. While the fine print is awaited, if this eliminates the need for participants to seek separate No Objection Certificates (NOCs) from their onshore regulators in India for setting-up a presence in GIFT IFSC, this will mean inter-regulatory issues (if any) can be resolved faster and this would significantly accelerate the time taken to launch operations in GIFT IFSC.
Offshore derivative instruments (ODIs) to be recognized as valid contracts and tax relaxation for non-resident ODI holders
The Budget 2023 proposes to amend section 18A of Securities Contract Act, 1956 to provide that ODI contracts issued by a Foreign Portfolio Investor (FPI) in GIFT IFSC and regulated by the IFSCA shall be legal contracts. This clears the path for Offshore Banking Units (IBUs) of foreign banks in GIFT IFSC to issue ODIs with permissible Indian securities as the underlying asset.
There already exists a favorable tax regime for IBUs in GIFT IFSC investing in Indian fixed-income securities under the FPI route, for taxation of interest as well as capital gains income [comparable/better than that available under India-Singapore tax treaty]. Additionally, in order to eliminate friction in taxation, it is proposed that income distributed by IBUs shall (subject to certain conditions) not be taxed in the hands of non-resident ODI holders.
The proposal is expected to encourage IBUs of foreign banks to issue ODIs to their clients. It remains to be seen whether following the Securities Contracts (Regulation) Act, 1956 (SCRA) amendment, the IFSCA will also, over time, permit FPIs set up as Alternative Investment Funds (AIFs) in GIFT to issue ODIs.
Relocation of funds
The Budget 2023 proposes to extend the time for tax-neutral relocation of funds from overseas jurisdictions into GIFT IFSC from the current 31 March 2023 by another two years. This will provide additional time to asset managers who have just been licensed to operate in GIFT IFSC or are in the process, to not only look at greenfield funds but also migrating existing offshore funds into GIFT IFSC.
IBU of foreign banks permitted to undertake acquisition financing
Currently, Indian External Commercial Borrowings (ECB) regulations do not permit lending by foreign lenders for equity investments, thereby restricting their ability to fund Indian corporates seeking to make domestic acquisitions. Therefore, financing for a domestic acquisition is generally procured from non-banking financial companies (NBFCs) or by the issuance of non-convertible debentures (NCDs) by the acquirer, which can be subscribed to by FPI.
Permitting acquisition financing by IBUs of foreign banks in GIFT IFSC may open a new business opportunity for foreign banks and will also open an additional avenue for the Indian corporates to raise finance for domestic acquisitions.
This article is written by Tejas Desai, Partner - Private Equity and Financial Services - Tax and Regulatory Services, EY India and Jugal Kajaria , Director Financial Services - Tax and Regulatory services, EY India.
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Summary
With quick and decisive steps taken by the GOI and IFSCA over the last few years, the GIFT IFSC is gaining critical mass in a short time. Every serious financial services player in the Indian market, whether domestic or global, may need to consider the regulatory and tax arbitrages of setting up a presence in say Singapore/Mauritius or even mainland India vis-à-vis a GIFT IFSC.
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