Union Budget 2025: Key expectations for GIFT IFSC growth

Stakeholders are optimistic that the government will deliver a budget that not only meets but exceeds their aspirations for the GIFT IFSC. (Representational image)

By Jaiman Patel

As the Union Budget 2025 is scheduled to be tabled in Parliament on February 1, 2025, the eyes of investors, fund managers, and financial institutions are keenly set on the potential reforms and incentives that could be announced for the GIFT City’s International Financial Services Centre (IFSC). The GIFT IFSC has been a cornerstone in India's quest to emerge as a global financial hub, and the upcoming budget is expected to address several critical aspects that could further bolster its growth and attractiveness.

Here’s what stakeholders are anticipating:

1. Tax Parity for Resident Investors in GIFT IFSC Making Outbound Investments
The IFSCA has levelled the playing field for GIFT IFSC funds for inbound investments, but resident investors face a tax disparity when investing abroad via IFSC compared to global financial centres like Singapore and Mauritius. Currently, residents investing through IFSC funds risk being taxed on accrued income, potentially at the Maximum Marginal Rate of 40% (plus surcharges), while those using offshore funds are taxed upon income receipt or redemption. To resolve this, it’s anticipated that IFSC funds will be brought in line with Singapore/Mauritius-based funds.

2. Inclusion of Non-Residents in OTC Transactions with Category-III AIFs
The budget is also expected to include non-residents entering into over-the-counter (OTC) transactions with Category-III Alternative Investment Funds (AIFs) in the IFSC under the exemption of Section 10(4E) of the Income Tax Act. This inclusion would provide the much-needed clarity and align the taxation of IFSC funds with the tax framework of IFSC banks.

3. Clarification on Characterisation of Securities for Category-III AIFs
Another anticipated clarification concerns the characterisation of securities listed on the IFSC stock exchanges as a ‘capital asset’. In line with SEBI-registered FPIs, stakeholders are seeking clear guidelines on the treatment of income from trading IFSC securities to ensure that there are no ambiguities, which could lead to litigation or tax uncertainties, thus promoting a more stable and predictable investment environment.

4. Non-Applicability of Deemed Dividend Provisions for Finance Companies in IFSC
The finance sector in the IFSC is also looking forward to the non-applicability of deemed dividend provisions under the Income Tax Act to amounts received by IFSC-based finance companies, particularly corporate treasury centres. Section 2(22)(e) of the Income Tax Act deems loans or advances from closely held companies to significant shareholders as dividends. To enhance the IFSC's appeal and avoid hindering its development, it’s recommended that finance companies, particularly treasury centres in GIFT IFSC, be exempt from the deemed dividend provisions.

5. Concessional Tax Rate for Green Bonds
With sustainability at the forefront of global finance, there is strong expectation for the introduction of a concessional tax rate (of 5% from the present 9%) for interest on green bonds listed exclusively on the GIFT IFSC exchange. This initiative would not only support environmentally sustainable projects but also position the GIFT IFSC as a leading centre for green finance, attracting a niche segment of investors focused on responsible investing.

6. Taxability of Units Post Tax Holiday Period
Lastly, it would be beneficial if the Union Budget 2025 could clarify the taxability of units set up in the IFSC after the expiration of the tax holiday period. Clarity on this front is crucial for long-term planning and investment decisions, as it impacts the return on investment and the overall attractiveness of setting up operations in the IFSC.

In conclusion, the Union Budget 2025 holds the promise of fortifying the foundation of the GIFT IFSC and propelling it to greater heights on the global stage. The expectations outlined above, if met, could significantly enhance the IFSC’s appeal and contribute to India’s reputation as a premier destination for international finance. Stakeholders are optimistic that the government will deliver a budget that not only meets but exceeds their aspirations for the GIFT IFSC.

(Jaiman Patel, Tax Partner – GIFT City, EY India.)

Views are personal, and do not represent the stand of this publication.