India’s growth story requires a robust financial sector, and the GIFT City IFSC (Gujarat International Finance Tec-City – International Financial Services Centre) launched in 2015 is expected to play a crucial role by utilizing global capital flows to meet India’s development needs besides providing a globally competitive financial platform for international financial services.
What is the GIFT City IFSC?
India’s first International Financial Services Center (IFSC) was established in 2015 in the Gujarat International Financial Tec-City (GIFT City) – a greenfield investment base located near Gandhinagar, the capital of the western state of Gujarat.
The GIFT City IFSC offers offshore financial market investors a range of benefits, which have become clearer and more competitive in the last two years. Recent tax regulation changes waive several tax liabilities, such as goods and services tax (GST), dividend distribution tax, and capital gains tax for entities operating in the IFSC.
Category III Alternative Investment Funds (AIF) setting up in IFSC GIFT City are expected to benefit from zero tax on bond trading and zero tax on derivative trading, in line with offshore treaties, according to tax experts.
The GIFT City IFSC offers various tax holidays and single window clearance to all business units and investors, making it a compelling value proposition for the financial services sector.
However, there are some near-term challenges to consider, such as competition from Singapore and Dubai, fast evolving financial markets requiring prompt regulatory response, and the need for clarity on applicable laws and jurisdictional courts in the event of dispute resolution.
Key stakeholders in GIFT City’s development and management include the Gujarat Urban Development Company Limited (GUDCL), Gujarat Industrial Development Corporation (GIDC), and Gujarat Maritime Board (GMB).
GIFT City is an outcome of the state’s planned tri-city approach and is located on the banks of the Sabarmati River between Ahmedabad and Gandhinagar.
GIFT City is located 30 minutes away each from Ahmedabad, which is the state’s industrial hub and a historical city, and Gandhinagar – the state capital and center of policymaking.
Each of the three areas – GIFT City, Ahmedabad, and Gandhinagar – has a distinct supportive ecosystem to facilitate business, industry, exports, international finance, and foreign investment.
- 20 mins from Ahmedabad International Airport
- Along National Highway 48 (Delhi-Mumbai Industrial Corridor)
- Metro connectivity to Ahmedabad
- 15 mins from nearest railway station
- 15 mins from high-speed rail, approved by the central government (under construction)
The IFSC [in GIFT City, Gujarat] is a special financial jurisdiction within the country, which allows foreign currency transactions to be conducted without capital control restrictions. This special dispensation allows global financial institutions to set up a base in GIFT IFSC and undertake international financial services transactions for India as well as overseas jurisdictions in a more efficient and reliable manner. – Dipesh Shah, IFSC Authority
The GIFT City special economic zone caters to the following financial service and related categories:
- Capital markets
- Fund management
- Finance company
- Aircraft leasing
- Ship leasing
- Global in-house centers (GICs)
- Foreign universities
- Ancillary services
Competitive with other global financial centers
GIFT City IFSC is at par with other financial centers in the following ways:
- Unified regulatory authority
- Competitive tax regime comparable to treaty jurisdictions like Singapore and Mauritius
- Relaxed company law
- Strategic time zone
- International arbitration center
Benefits of setting up a business entity at the GIFT City
Financial companies, investors, and service providers will benefit from the area’s planned infrastructure, streamlined bureaucracy, and digitized ecosystem in the following ways:
- Ease of doing business: Single window clearance, all approvals under one umbrella allotment / planning / construction / occupancy
- Duty relaxation: Gujarat state exemption from stamp duty and registration charges
- Incentives: Gujarat state’s provision of development incentives; payment schedule linked to development
- Setting up: Plug & play infrastructure
- Comparable cost efficiency: 20 percent reduction in operating costs and sustainable development model
- Gujarat IT/ITeS Policy incentives: EPF reimbursement, lease rental subsidy, power subsidy, etc.
- Talent sourcing: Premier institutions in Gujarat include IIM Ahmedabad, MICA, CEPT University, GMU, Entrepreneurship Development Institute of India, National Institute of Design, NIRMA University, NIFT, Gujarat National Law University, Pandit Deendayal Energy University (PDPU), Lalbhai Dalpatbhai College of Engineering, NIPER-A (National Institute of Pharmaceutical Education and Research), etc.
Industries benefiting from GIFT City Domestic Tariff Area (DTA)
|IT and IT-enabled services||Engineering||Fintech||Automobiles|
|Capital market||Pharmaceuticals||Biotechnology sector|
Measures to promote growth in the GIFT City IFSC under the Finance Act, 2023
- Modifying the definition of ‘original fund’ to simplify tax-neutral relocation of offshore funds fully owned and controlled by Abu Dhabi Investment Authority and the Government of Dubai to the IFSC.
- Exempting Alternative Investment Funds (AIFs) established in the IFSC from the angel tax on shares issued by unlisted Indian companies.
- Introducing additional incentives for aircraft leasing in the IFSC, including exempting capital gains from the transfer of equity shares of a domestic company and increasing the dividend income of units of IFSC primarily engaged in aircraft leasing.
- Extending the tax holiday for Offshore Banking Units (OBUs) in the IFSC to 100 percent for the assessment year starting from April 1, 2023.
- Lowering the tax rate on dividend distributions by IFSC units to 10 percent (compared to the 20 percent rate for dividends received by non-IFSC Indian companies), potentially encouraging investments from non-residents in the IFSC.
- Offering a concessional rate of withholding tax on interest income earned by non-residents from long-term or rupee-denominated bonds listed on IFSC stock exchanges. This is aimed at attracting investments in long-term or rupee-denominated bonds by non-residents in the IFSC.
Existing fiscal benefits in the GIFT City IFSC
Units in the IFSC will benefit from the below incentives:
- Exemption: 100 percent tax exemption for 10 years out of 15 years. IFSC unit has the flexibility to select any 10 years out of a 15-year block period.
- Minimum tax paid: MAT (Minimum Alternate Tax) / AMT (Alternate Minimum Tax) at 9 percent of book profits applies to Company / others that have set up as a unit in the IFSC. MAT is not applicable to companies in the IFSC that opt for the new tax regime.
- Dividend paid to shareholders of company in IFSC: From 01 April 2020, dividend income distributed by Company in IFSC to be taxed in the hands of the shareholder.
Investors will have access to the below incentives:
- Interest income paid to non-residents on: (i) Money lent to IFSC units is not taxable and (ii) Long Term Bonds and Rupee Denominated Bonds listed on IFSC exchanges are taxable at a lower rate of 4 percent.
- Transfer of specified securities listed on IFSC exchanges by a non-resident not treated as transfer: Gains accruing thereon is not chargeable to tax in India.
Goods and services tax
Units in the IFSC should note the below measures:
- No GST on services that are: (i) received by a unit in the IFSC and/or (ii) provided to IFSC / SEZ units, offshore clients.
- GST applicable on services provided to Domestic Tariff Area (DTA).
Investors will not incur GST on transactions conducted in IFSC exchanges.
Other taxes and duties
- Units in the IFSC will have access to state subsidies – lease rental, provident fund (PF) contribution, electricity charges.
- Investors will receive exemption from Security Transaction Tax (STT), Commodity Transaction Tax (CTT), stamp duty in respect of transactions carries out on IFSC exchanges.
Existing operational benefits in the GIFT City
Exemption from currency control regulations for IFSC units:
- Under the SEZ Act, a unit set up in the IFSC is treated as a non-resident. Even under the Foreign Exchange Management Act, 2002 (FEMA), units in the IFSC will enjoy the benefits of a non-resident under exchange control provisions.
Liberalized currency control regime for Indian residents:
- Foreign Exchange Management (Transfer or Issue of any Foreign Security) Regulations, 2004 (ODI Regulations) restricts investment by an Indian resident into an overseas firm in the financial services sector.
- The central bank, Reserve Bank of India (RBI), through its Circular dated May 12, 2021 permits sponsor contribution from a sponsor Indian party in an alternative investment fund / AIF established overseas, which includes the GIFT IFSC.
Who should set up at the GIFT City?
- Borrowing and lending
- External commercial borrowing and trade finance
- Trading and clearing member
- Derivative products
- Alternate investment funds or AIFs
- Portfolio management services (PMS)
- Investment advisors (IA)
- Wealth management
- Fund accounting
- Trustee services
- Depository and custodian services
- Derivatives trading – equities, index, currency, commodities
- Trading and investments
- Debt listing
- Direct insurance
- IFSC insurance intermediaries
Allied / ancillary services
- Global-in-house centers or GICs
- Accounting and audit services
- Legal and taxations services
- Trusteeship services
- Management consulting services
- Compliance and secretarial services
Emerging IFSC businesses
- Aircraft leasing and financing
- International Bullion Exchange
- Finance company
Growth in volume of business activity at GIFT City IFSC
Growth scope in financial sub-sectors
Units in the IFSC
Average daily turnover of stock exchanges
Amount committed to Alternative Investment Funds
Size of banking assets
Cumulative banking transactions
More than US$407 billion
Cumulative derivative transactions
More than US$534 billion
Gross premium booked by GIFT City IFSC Insurance Office
Re-insurance premium arranged by insurance intermediaries at GIFT City IFSC
Employment created at the IFSC
Over 5000 jobs
Over 2500 jobs
Source: EY, IFSCA
Note: *refers to December 2020 data.
The International Financial Services Centre Authority (IFSCA), which was constituted in 2020, and the Indian central government note that 23 banks, 60+ broker dealers, 50+ funds, 40+ ancillary services, and 23 insurance companies and intermediaries have set up at the IFSC in GIFT City.
In FY 2022-23, as many as 140 entities registered at the GIFT IFSC, including Morgan Stanley, MUFG Bank, BNP Paribas, JP Morgan, and Deutsche Bank. The IFSC zone is currently seeing over 10 million square feet of commercial and residential space being developed. Among these, the Bank of America has begun operations in the SEZ area and global financial services giant Morgan Stanley will soon start operations at the IFSC with its Category-3 Alternative Investment Fund (AIF).
In just the last two years, more than 450 entities have registered across a range of financial sub-sectors – banks, capital markets, insurance, fintech, aircraft leasing, bullion exchange, etc.
Transfer of funds following SVB collapse
Moreover, following the collapse of Silicon Valley Bank, as on March 17, 2023, around US$200 million out of the nearly US$1 billion, was transferred from SVB to GIFT City accounts by Indian companies – according to Minister of State for Electronics and IT Rajeev Chandrasekhar. As per reporting by The Economic Times, the companies include technology start-ups with “little client or supplier presence in the US”.
Fintech firm Razorpay’s business banking platform for start-ups are among those facilitating the transfer of funds out of the US. Banks facilitating the opening of GIFT City accounts for start-ups and investors include RBL Bank, HSBC, ICICI Bank, Kotak Mahindra Bank, and Axis Bank.
Out of the 21 banks operating an IFSC banking unit, 13 are Indian banks.
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