Budget 2021: Government encourages on-shoring of AIFs at GIFT City

In an attempt to encourage on-shoring of financial services, India is turning Ahmedabad based Gujarat International Finance Tec (GIFT) City into a global financial hub.

During her Union Budget 2021 speech on Monday, finance minister Nirmala Sitharaman, said, “The government is committed to make the International Financial Services Centre (IFSC) in GIFT City a global financial hub.”

“In addition to the tax incentives already provided, I propose to include, among others, tax holiday for capital gains for aircraft leasing companies, tax exemption for aircraft lease rentals paid to foreign lessors; tax incentive for relocating foreign funds in the IFSC; and to allow tax exemption to the investment division of foreign banks located in IFSC,” she added.

Under the regulatory provisions set by the government, IFSC is a non-resident zone as per Foreign Exchange Management Act (FEMA) though it is treated as a resident entity under the Income Tax Act. 

The announcement is expected to encourage Indian funds registered in jurisdictions such as Singapore, Ireland and Mauritius, countries known for their tax-friendly regime, to transfer investments to Indian entities set up at IFSC. 

New funds set up in IFSC will be able to issue equivalent units to foreign investors in the offshore entity. The government had also provided exemption on capital gain arising from relocation of funds to IFSC apart from tax exemption to shareholders and unit-holders for any gains that may arise on account of exchange of units.

“The comprehensive tax amendment package of providing for tax neutral transfer of investments from offshore funds to IFSC Alternative Investment Fund (AIF) along with corresponding amendments like provision for considering holding period and cost of previous owner and non-lapsing of losses at the investee entity level is aimed at incentivizing the re-domiciliation of India focused offshore funds to IFSC AIFs,” Tushar Sachade, partner Deals at PwC and member of regulatory affairs committee at Indian Private Equity and Venture Capital Association (IVCA), an industry body, said. 

While the government had announced the tax sops for GIFT City in the monsoon session of parliament in September 2020, the budget announcement clears up the path for relocation of funds. Providing regulatory clarity on taxation and relocation of funds to IFSC was among one of the budgetary recommendations submitted by IVCA. 

“Amendments proposed as regards to setting up in IFSC particularly on relocation of an existing fund is a step in the direction of building India as a financial services hub in the near future. However, certain conditions such as those which require the fund to be subject to applicable investor protection regulation in its original country of incorporation may need clarity failing which the objective may not be achieved,” Ritesh Kumar S, partner at legal firm, IndusLaw said.

In a statement, chairman of fintech industry body Payments Council of India and executive director at Infibeam Avenues, Vishwas Patel welcomed the setting up of the fintech hub at GIFT City. 

“The tax announcement would help in attracting global players in the Fund business, aircraft leasing and financing business and offshore investment banking sector to set up their base in GIFT IFSC,” Tapan Ray, managing director and group CEO at GIFT City said in a statement. 

The GIFT City and IFSC were set up through a joint venture by the state government of Gujarat in three phases. The project is expected to be completed by 2024.