Gift City in Gujarat and Financial Sector Incentives – Finance and Banking

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Introduction:

Gujarat International Fin-Tec City (“GIFT City“) is a global financial and IT services center established under the Special Economic Zones Act 2005 (“SEZ Act“). Gift City includes ‘International Financial Services Centre’ (“IFSC“), which is a special economic zone (“SEZ“) for financial services. IFSC aims to provide easy access to global investors for the establishment of businesses in the fields of banking, insurance, capital market and asset and fund management. In addition to being a global hub for international finance and technology transactions, IFSC in GIFT City will also act as a bridge between local businesses, international investors and technology leaders. 2015 budget of Late Arun Jaitley (then Union Finance Minister), it was stated that GIFT city would be developed along the lines of international business centers in Singapore and Dubai.1

Regulatory framework :

To facilitate the conduct of business in the IFSC, the Government of India (“GoI“) introduced comprehensive legal and regulatory reforms. IFSC Authority Act, 2019 (“IFSCA law“) was enacted to provide for the establishment of the IFSC Authority – a unified regulatory authority for the banking, insurance, securities and fund management industries. The IFSC Authority is mandated to develop and regulate the financial services market within the IFSC IFSC Authority headquartered in Gandhinagar, Gujarat was notified by the GoI on 27th April 2020.

Under the IFSCA Act, the IFSC Authority has been given all the statutory powers originally vested in the Reserve Bank of India (“RBI“), Securities & Exchange Board of India (“SEBI“), Insurance Regulatory Development Authority of India (“IRDAI”) and the Indian Pension Funds Regulatory Development Authority (“PRDAI“).2 This much-awaited unified regulator is expected to speed up the licensing process for the creation of new business units and approve innovative financial products in banking, insurance, capital markets and fund management.

IFSC Incentives:

The Government of India and the Government of Gujarat have provided a host of incentives to the entities that have created the GIFT City. These incentives range from exemption from registration fees and stamp duties to tax benefits. The details of the incentives are shown below:

  1. Tax incentives to IFSC units:
  1. Income tax:

1.1 Units in IFSC:

  1. 100% tax exemption for 10 years out of 15 years
  2. The IFSC unit has the option to select any 10-year block out of 15 years
  3. MAT/AMT @ 9% of accounting profit applies to companies/others set up as a unit in the IFSC – MAT not applicable to IFSC companies opting for a new tax regime
  4. Dividend paid to shareholders of the company in IFSC: from April 1, 2020, dividend income distributed by the company in IFSC will be taxed in the hands of the shareholder.

1.2 Investors:

  1. Interest income paid to non-residents on: (i) Money lent to IFSC units tax free. (ii) Long term bonds and Rupee denominated bonds listed on IFSC stock exchanges taxable at a lower rate of 4%
  2. Transfer of Specified Securities* listed on the IFSC stock exchanges by a non-resident not treated as a transfer – Gains generated thereon are not taxable in India
  1. Goods and Services Tax (GST):

2.1 Units in IFSC:

  1. No GST on services: (i) received by the unit in the IFSC. (ii) supplied to IFSC/SEZ units, offshore customers.
  2. GST applicable on services provided to the domestic rate zone

2.2 Investors:

  1. No GST on transactions made in IFSC exchanges
  1. Other taxes and duties:

3.1 Units in IFSC:

  1. State subsidies – Lease rental, PF contribution, electricity charges

3.2 Investors:

  1. Exemption from Security Transaction Tax (STT), Commodity Transaction Tax (CTT), Stamp Duty in respect of transactions made on IFSC exchanges.
  1. Operational benefits:
  1. Exemption from currency control rules for IFSC units:

    Under the SEZ Act, a unit created within the IFSC is treated as a non-resident. Even under the Foreign Exchange Management Act 2002 (“FEMA“) IFSC shares enjoy the benefits of a non-resident under exchange control provisions.3

  2. Liberalized exchange control regime for Indian residents:

    The Foreign Exchange Management (Transfer or Issuance of Any Foreign Securities) Regulations 2004 (“ODI Regulations”) restrict investment by an Indian resident in a foreign business in the financial services sector. To enable Indian residents to create and invest funds in GIFT City, RBI, in its circular dated May 12, 2021, has authorized the contribution of an Indian Sponsor to an Alternative Investment Fund (AIF) established at the abroad, including the IFSC.

Opportunities for the banking sector in the IFSC:

Indian banks and foreign banks can establish their business units in the IFSC and can undertake the following activities in the IFSC:

  1. Asset activity:

1.1 External Commercial Borrowing (ECB) Loans to Indian Borrowers. Indian borrowers may prefer IBU loans due to physical proximity and known documentation.

1.2 Buyer Credit Facilities to Indian Borrowers: As per RBI guidelines, Indian branches of banks are not permitted to provide buyer credit facilities to customers. However, as IBU is an offshore branch, it can provide credit facilities to Indian buyers.

1.3 Currency Loans to foreign companies.

1.4 Foreign Currency Lending to Entities Registered with the IFSC.

1.5 Export of bill discounting service to Indian companies.

1.6 Financing Leasing and acquisition of aircraft and ships.

  1. Public liability :

2.1 Open current foreign currency savings accounts for resident individuals and non-resident individuals in accordance with IFSCA regulations.

2.2 Foreign currency deposits from banks, companies or individuals.

  1. Exchange operations:

3.1 Clearing and Settlement Activities for Exchanges in the IFSC.

3.2 Professional Clearing Services.

3.3 Securities Custody Services (Certificates of Deposit) Registered with the IFSC.

Challenges:

  1. Less clarity on the applicable law and the competent courts in the settlement of disputes.
  2. Competition from existing IFCs such as Dubai and Singapore.
  3. Changing market practices and regulations.

Conclusion:

As detailed above, GIFT City’s IFSC offers various benefits to entities establishing operations, including a liberal tax regime, currency control regulations, and more. businesses, the Indian government has made an effort to boost the development of IFSC. Considering the size of the Indian economy, there may be a lot of business potential in the IFSC. With tax exemptions and one-stop clearance for all businesses, the IFSC could present a very valuable proposition to the financial industry.

Footnotes

1. Budget Speech by Honorable Minister of Finance for Union Budget 2015-2016 https://www.indiabudget.gov.in/budget2015-2016/bspeecha.asp

2. Section 13 of the International Financial Services Center Authority Act 2019.

3. Foreign Exchange Management (International Financial Services Center) Regulations 2015

4. Design | GIFT Gujarat, Gujarat International Tec City, Gujarat International Finance Tec-City (GIFT)

5. FAQ-General-Latest.pdf (giftgujarat.in)

6. FAQ-GIFT-IFSC-Latest.pdf (giftgujarat.in)

7. Financial services sector | International Financial Services Center (giftgujarat.in)

8. IFSC Units (giftsez.com)

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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