GIFT City gets a booster dose as Budget doles out tax benefits for ship leasing companies

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GIFT City, which is India’s only International Financial Services Centre (IFSC), has got a shot in the arm in the Union Budget as the government has introduced tax benefits for ship leasing companies that establish their presence in the special zone.

Dividends and capital gains for the umbrella entity of a special purpose vehicle involved in ship leasing activities and having a presence in GIFT City will now be tax-free. This, according to experts, is expected to boost ship leasing business at the Gujarat-based IFSC GIFT City.

Earlier, the tax advantage was available only for aircraft leasing activities originating from GIFT City.

"This will lead to more active ship leasing activities from GIFT City similar to aircraft leasing," said Rahul Charkha, partner at Economic Laws Practice.

"IFSCA has undertaken several initiatives to promote GIFT City as a hub for ship leasing activities and these initiatives are aimed at creating a conducive environment for ship leasing entities and attracting global players to set up operations in GIFT City," said Suresh Swamy, Partner at Price Waterhouse and Co LLP.

The parent-entity that owns the ship has to put in place a special purpose vehicle (SPV) in GIFT IFSC to lease the ships. The leasing part of the business can be done via the SPV and technically every ship of the parent entity will have to be under a separate to mitigate risk.

Traditionally, when a ship is sold, the IFSC provides a tax holiday on capital gains. But to claim this benefit, the SPV that owned the ship had to be shut down after selling the ship, said Swamy.

Now, the new rule says, "Capital gains on the sale of equity shares will now be exempt from taxes."

So, ship leasing entities can transfer ownership of equity shares of the SPV hassle-free, without the need for winding up, while still enjoying the tax-free incentives, said Swamy. Even non-residents investors who sell shares of these ship-owning companies in the IFSC won’t be taxed on capital gains, Swamy added.

Till now, such tax-free capital gains were available only for aircraft leasing firms due to which GIFT IFSC saw lot of activity in the aircraft leasing space but ship leasing activity remained minimal, said Charkha.

As of December 2024, total aviation assets leased from GIFT IFSC was 196 compared to only 13 ships leased in the same period.

A lot of ship leasing currently happens from places like Singapore where the flagging regulations are liberal, said Charkha. There are other jurisdictions like Marshal Islands, which are conducive for ship leasing activity, he adds.

Earlier in June, the GIFT City regulator, IFSCA, was actively engaging in outreach programmes with various overseas companies and jurisdictions for ship leasing. K Rajaraman, chairman of IFSCA had elaborated about a specific outreach programme where the regulatory body was engaged in discussions with representatives of the shipping industry of Greece, which has one of the world’s largest merchant fleets -- the country controls over 20 percent of the global merchant fleet capacity.

The outreach programme with the officials of the shipping sector of Greece was done with a specific intent of creating awareness about the opportunities related to setting up of ship-leasing units at GIFT City.

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