As published on livemint.com, Tuesday 1 February, 2022.
Gujarat International Finance Tech (GIFT) City related announcements has been a regular feature in union budget since the BJP-led government came to the centre in 2014. This time it is no different, the incentives for GIFT City and International Financial Services Centre (IFSC) can broadly be categorised in four parts.
A dedicated international arbitration centre for cross border dispute resolutions, setting up of foreign universities, tax exemption for ship leasing and financing and tax exemptions for offshore fund management and offshore banking activities happening in the IFSC.
“GIFT IFSC has featured prominently, which reflects the importance Government of India attaches to develop a vibrant and business friendly international financial services ecosystem within the country to aid and assist the realization of our goal of a USD 5 Trillion economy. The establishment and empowerment of IFSCA as a unified financial regulator duly supported by several measures, to put in place a competitive regulatory framework and tax regime, including greater ease of doing business has reinforced the position of GIFT IFSC as a gateway for global capital flows into and out of India," said Injeti Srinivas, chairman, IFSC Authority (IFSCA).
IFSC is India’s Offshore Financial Centre (OFCs), meaning the bulk of financial sector transactions on both sides of the balance sheets are with individuals or companies that are not residents of OFCs.
“Proposal to set-up an international arbitration centre in the GIFT City, something on similar lines of the Singapore International Arbitration Centre (SIAC), will boost foreign investor confidence in IFSCs and will bring in international best practices to its doorsteps," said Tejesh Chitlangi, senior partner, IC Universal Legal.
Arbitration centres help in speedy resolution of commercial disputes between parties across the borders.
For the past four years the GIFT City had an office of SIAC however this never took off partly because this office could only hear matters and not give arbitration awards. The other factor which contributed in the low success rate was lack of regulatory support.
The proposed arbitration centre will have the regulatory support of IFSCA and necessary regulation.
“The value of financial products and services in an IFSC is always intrinsically dependent entirely on the quality of the contract enforcement infrastructure available at the IFSC. The centre will help in improving India’s rankings for contract enforcement globally," said Tejas karia, national practice head and Partner, arbitration, Shardul Amarchand Mangaldas.
Some experts say that for the IFSC arbitration centre to be credible competition and make it preferred seat of arbitration and mediation would require specialist foreign and domestic law firms.
Presently foreign law firms are not allowed in the IFSC in-line with the mainland. While India has opened up itself to foreign institutions in almost all sectors, two major areas it never did was allowing foreign law firms and foreign universities and education institutes.
Away from the long-standing belief that education needs to be affordable, the union government allowed foreign education institutions to be set up in the IFSC.
“The entry of foreign universities through GIFT IFSC can potentially be a game changer. While the New Education Policy 2020 spoke of creating a legislative framework to facilitate entry and operation of top 100 universities in India, the Government is yet to spell out such framework. The stated intent of the Government is to allow world class foreign universities to come to GIFT IFSC unshackled from domestic regulation and so GIFT IFSC may allow a foot in the door for such varsities keen to enter India," said Satyendra Shrivastava, co-founding partner of Consortia Legal.
Given that scope of GIFT IFSC is confined to financial services, disciplines related to financial management, finance and fin-tech may be allowed initially. If the GIFT experiment is successful, it could also be a template for foreign universities to operate in other Special Economic Zones (SEZ) in future.
In the union budget of 2021, the government had given tax exemption to aviation leasing and financing. The budget for 2022 extended the tax exemption to shipping.
“Income from transfer of a ship which was leased by an IFSC unit shall also be eligible for tax holiday if the unit has commenced operation on or before the 31st March, 2024 (existing clause covers transfer of aircraft). Income by way of royalty and interest is also exempt," said Girish Vanvari founder, Transaction Square, a tax consultancy firm.
So far twelve aircraft companies have applied to set up units for leasing in IFSC and ten already have approval from the IFSCA. Some of the names include - Acumen Aviation, Aerofin Ind, Jetsetfleet Management among others.
Another step towards making IFSC efficient from tax perspective is fresh incentives for derivatives instruments and portfolio management services. Last year the budget had given big bang tax exemptions to the fund industry which has resulted in over 20 funds being set up at IFSC.
“This year budget added new activities to the menu card of IFSC like shop leasing, financing, offshore derivative, over the counter derivatives and portfolio management services offered by Offshore Banking Unit. This will ensure IFSC to be a comprehensive Service Centre and will attract more takers," said Amit Singhania, Partner, Tax, Shardul Amarchand Mangaldas.
The last year budget had also allowed tax exemption for funds who are willing to domicile themselves from other countries such as Mauritius, Hong Kong, Singapore to IFSC. So far this transfer of fund structures to IFSC has not happened.