Since the financial services sector is one of the significant contributors to India's growing economy, the Union Budgets always focus on measures to strengthen this sector. Naturally, the past few years have witnessed several reforms on the tax and regulatory front in this sector aimed at bolstering the country's position on the global index.
One such reform was setting-up of the International Financial Services Centre (‘IFSC’), India’s first global financial services hub. The Gujarat International Finance Tec -City (IFSC-GIFT City) provides an unprecedented opportunity to global investors to set up businesses in the areas of banking, insurance, capital market and asset management.
Prime Minister Narendra Modi has emphasised India's emergence as one of the fastest-growing fintech markets globally, stressing its alignment with the vision for IFSC-GIFT City as a gateway to the global fintech industry as well as a pioneering fintech hub fostering innovation and experimentation in the sector.
With the aim of onshoring the fund management activities currently being undertaken by the managers from traditional overseas jurisdictions, the government sensed the need to develop a best-in-class regulatory regime for funds and fund managers in IFSC.
There are numerous measures already undertaken on the tax and regulatory front to incentivise fund managers' basic public consultation approach, to consider setting up presence in IFSC-GIFT City. These reforms by the government have given an impetus to investor confidence in IFSC-GIFT City as a jurisdiction to set-up investment vehicles.
The growing pace of funds being set-up in the GIFT City and the multiplying assets under management is an impact of the move in the right direction by the government in furtherance to their agenda to develop the fund managers ecosystem in GIFT City.
Alongside the existing tax and regulatory advantages offered within IFSC-GIFT City, the fund management industry has outlined specific tax-related requests for funds and fund managers in IFSC-GIFT City, which they urge the government to address in the upcoming Budget:
● Introduction of concessional rates under domestic tax law which are in line with tax rates under the tax treaties entered into by India with various jurisdictions to bring certainty in taxation similar to the special tax regime accorded to Cat III alternative investment funds (AIFs) in IFSC;
● In order to incentivise and to provide adequate time to the offshore fund managers to migrate to IFSC-GIFT City, it is recommended that the sunset clause (currently 31 March 2025) for relocation of offshore funds to IFSC-GIFT City be extended;
● Remittance / distributions from IFSC to non-resident investors continue to involve requirement of certain compliances such as furnishing form 15CA / 15CB. Exemption to fund / fund managers in IFSC from such requirement while making distributions to non-residents shall ease compliance burden and crunch remittance timelines;
● Effective tax rates for income from IFSC continue to remain high compared to the corresponding rates under the tax treaties owing to applicability of surcharge. Exempting IFSC units from being subjected to surcharge / rationalization in levy of surcharge under the Act would remove disparity in tax rate arising owing to surcharge;
● Introducing concessional tax treatment for individuals taking up employment in IFSC shall incentivise individuals to migrate to IFSC thus making available sufficient talent pool for funds migrating / establishing presence in IFSC;
● Appropriate mechanism / procedure / form be prescribed under the Act which shall enable non-resident investors (mainly those opting for exemption from obtaining PAN and filing tax returns in India) in units in IFSC to avail tax credit in their home jurisdiction;
● IFSCA has been contemplating to promote variable capital company (VCC) in the fund activity space in the IFSC-GIFT City. Given that the industry is interested in the VCC regime and is awaiting introduction of the same, IFSCA may expedite its process on issuing Regulations on the VCC regime in IFSC-GIFT City.
The above asks are mainly intended to bring parity in tax regime for IFSC with those prevailing in existing financial services centres across the globe. Prioritising IFSC-GIFT City as a global financial hub and refining tax structures and regulatory frameworks are critical imperatives going forward. A cohesive approach to these reforms will foster a resilient and forward-looking financial ecosystem.
These measures would go a long way to incentivise the fund managers to establish presence in IFSC, thus giving furtherance to the ‘Onshoring the Offshore’ agenda of the government. A simple tax structure with less compliance would bring tax certainty thereby boosting investor confidence and a surge in the foreign investments in India being routed through IFSC GIFT City, enabling fund managers to tap business opportunities within India and outside India.
The above recommendations are centered around creating a conducive tax environment that promotes investment, simplifies compliance, and enhances competitiveness in the global financial services landscape.
--The authors; Amit Kedia and Hiten Ved, are Chartered Accounts at Walker Chandiok & Co. LLP. The views are personal.