GIFT City, which is India’s first and only International Financial Services Centre (IFSC), is fast emerging as a popular destination for foreign portfolio investors (FPIs) who are choosing the special zone over the much older and traditional routes of investing in India via Mauritius or Singapore.
According to legal experts and industry players, the trend is being primarily driven by the efforts of the Indian government which is pushing GIFT City over common investment channels through Mauritius, Singapore, Netherlands, or Luxembourg by doling out tax benefits and enhanced ease of doing business metrics.
While GIFT City offers guaranteed tax benefits backed by a proper legal and regulatory framework, such benefits – including those based on double taxation avoidance agreement (DTAA) -- from other countries have come under the scanner and hence are not reliable, they add.
“The ten-year exemption on any type of business income in GIFT City is a legal provision, so chances of the government modifying it are very remote,” says Vinod Joseph, Partner at Economic Laws Practice.
He further said that in the case of a double tax agreement (DTA) between India and Singapore, the Indian government can renegotiate the terms of the DTA and take away the tax benefit.
This assumes significance as the recent past has seen India amending such tax avoidance treaties with the specific aim of dissuading tax avoidance.
“After the amendment, the compliance burden has increased for FPIs and there is more reporting to be done from the FPI side, which is encouraging investors to move to GIFT City,” says Rohit Arora, CEO and Co-founder of Biz2X, a fintech platform.
Incidentally, the recent amendment introduced a Principal Purpose Test (PPT) to prevent treaty abuse by taxpayers.
The amendment requires Mauritius-based funds, which invested in India before the cut-off date and have not yet exited those investments, to provide evidence of 'substantiation.' They must explain why Mauritius was selected as the jurisdiction and confirm whether these funds had genuine business operations in the island nation.
“A part of the government is indicating the larger investment community to be in GIFT City if they really want a tax-free structure. If you are not in GIFT City and are expecting (the government) to support the FPIs using the Mauritius or Singapore route, it will be challenging,” says Shravan Shetty, managing director at Primus Partners, a business and management consultancy firm.
Capital markets regulator Securities and Exchange Board of India (SEBI) is also doing its bit by recently allowing FPIs established in GIFT City to accept a higher quantum of investments from Non-Resident Indians (NRIs) and Persons of Indian Origin (PIOs).
Earlier, NRIs and OCIs could only invest up to 50 percent in FPIs, though now they can own up to 100 percent of a global fund set up at GIFT City.
“The rule change has led to more FPIs preferring GIFT City over the Mauritius and Singapore route,” says Joseph.
Interestingly, the cost of setting up and other operational costs in GIFT City are significantly lower compared to Singapore and Dubai.
“While both Singapore and Dubai are established financial hubs, the lower expenses associated with GIFT City make it a more viable option for many people looking to maximize their financial efficiency and operational flexibility,” says Siddharth Mody, Partner at JSA Advocates and Solicitors.
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