Budget 2019

More concessions for GIFT City: Will companies fall for the bait?

Lokeshwarri SK BL Research Bureau | Updated on July 05, 2019 Published on July 05, 2019

Companies and MFs operating in the IFSC have also been exempted from DDT from current and accumulated incomes   -  Paul Noronha

The GIFT IFSC is progressing at a decent pace with both the BSE and the NSE setting up subsidiaries to offer a trading platform for foreign and global investors

The Gujarat International Finance Tec-City (GIFT City) is among the flagship efforts of the Modi government. In this Budget, the Centre has rolled out more sops for companies setting up offices in GIFT City.

Tax exemptions

Currently, under the provisions of Section 80LA, profit-linked deduction equal to 100 per cent of income for the first five consecutive assessment years and 50 per cent of income for the next five consecutive assessment years is provided to units of an IFSC.

This is now being increased to 100 per cent for any 10 consecutive years, out of 15 years beginning with the year in which the necessary permission was obtained.

Companies and mutual funds operating in the IFSC have also been exempted from dividend distribution tax (DDT) from current and accumulated incomes. Category III alternate investment funds (AIFs) have been exempted from capital gains and tax incentives are provided on interest payments on loan taken from non-residents.

“Key measures related to aircraft leasing business, reinsurance business, and tax benefits, will enable significant offshore finance activities to take place from India and create jobs in the financial services industry. It will bring back billions of dollars of business which India has been losing to other competing global financial hubs,” says Tapan Ray, MD & Group CEO, GIFT City. “The setting up of a Unified Regulator will further put GIFT IFSC in a fast-track mode.”

The objective of the GIFT City is two-fold. One, to provide a space with state-of-the-art infrastructure for domestic companies to set up shop.

This is the domestic area of the GIFT City that houses many tech, financial and other companies.

Then, there is the multi-service special economic zone (SEZ) where companies that are into services exports can re-locate and export from. Within the SEZ is the International Financial Service Centre (IFSC). The GIFT IFSC intends to eventually compete with other IFSCs such as Singapore and Dubai in facilitating flow and investment of international capital.

The GIFT IFSC is progressing at a decent pace with both the BSE and the NSE setting up subsidiaries to offer a trading platform for foreign and global investors. Many intermediaries, banks, custodians and insurance companies have also begun operations.

A variety of tax sops have been offered to companies that operate out of the GIFT IFSC, such as exemptions from securities transaction tax, commodities transaction tax, DDT, long-term capital gain tax and stamp duty on capital market transactions. The MAT rate charged to companies is also quite low.

Now the Centre is giving additional sops to units in the IFSC.

Hub to raise funds

There is no doubt that creation of a vibrant international financial services centre will help domestic businesses raise funds from overseas investors easily, domestic investors will be able to participate in international exchanges and more importantly, the migration of exchange volume from domestic exchanges to other IFSCs in Singapore, Dubai and Hong Kong will halt.

While the basic rules are in place and many entities have begun operations, there are many regulatory glitches that still need ironing out. The fact that the rupee is partially convertible on the capital account is one of the major hurdles in the progress of the IFSC as it impedes free flow of domestic money into the IFSC. Domestic investors cannot participate in GIFT exchanges as they cannot use the limits under the LRS (liberalised remittance scheme) to invest in derivatives.

The most important impediment currently is the RBI dragging its feet in permitting trading of rupee derivatives on the exchanges in GIFT City.

Since the main objective of the GIFT IFSC is to bring the overseas volume in rupee derivatives to domestic exchanges, delay in granting this permission is impeding the progress.

Published on July 05, 2019
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