With numerous legislative reforms, the government has demonstrated a sincere commitment towards achieving Viksit Bharat, or ‘Developed India’ by 2047. While presenting the Union Budget for financial year 2024-25, on July 23, 2024, Finance Minister Nirmala Sitharaman introduced significant changes to enhance ease of doing business in the International Financial Services Centre (“IFSC”), Gujarat International Finance Tec-City (“GIFT City”). This Budget promises a supportive environment for growth and development, thus giving a fillip to aspiring entities, desiring to have a presence in GIFT IFSC.
STRATEGIC INCENTIVES FOR IFSC ENTITIES
Specified Funds
In a bid to attract foreign and domestic investors to IFSC and foster a vibrant funds ecosystem, this Budget has proposed significant measures for funds set up as a retail scheme or an exchange traded fund (“ETFs”) and are regulated by the International Financial Services Centres Authority (“IFSCA”), under the IFSCA (Fund Management) Regulations, 2022.
Such funds in GIFT IFSC would enjoy tax exemption benefits akin to specified funds (such as Category III alternative investment fund) under Section 10(4D) of the Income Tax Act (“ITA”) from financial year 2024-25 onwards. Certain specified income generated by specified funds would be tax exempt, to the extent it is attributable to units owned by non-residents, subject to satisfaction of prescribed conditions. Moreover, the income tax paid on income from securities by specified funds will be exempt from surcharge, making them attractive for global fund managers.
Angel Tax
The introduction of ‘angel tax’ through the Finance Act, 2012, had sparked significant debate and presented considerable hurdles for companies and investors over the years. It sought to tax excess share premium (i.e., premium paid over and above the fair market value of the shares) paid on the issuance of shares of a closely held company in India. Earlier, angel tax solely applied to equity investments from Indian residents, but it was expanded, vide the Finance Act, 2023, to include such investments from non-resident investors as well. The valuation methodology employed by taxpayers often led to legal disputes. The recent Budget provides for abolishment of angel tax (including IFSC) from financial year 2024-25, which will help attract higher foreign capital inflow, marking a positive shift towards creating a conducive environment for start-ups.
Finance Companies
This Budget proposes to extend the relaxation of thin capitalisation rules to finance companies established in the IFSC. Under Section 94B of the ITA, there are limits on deduction of interest expenses for debt provided by a non-resident to an Indian company or permanent establishment (“PE”) of a foreign company in India. When interest expense of a company or PE exceeds one crore rupees, deduction would be limited to 30% of its earnings before interest, taxes, depreciation and amortisation.
Currently, thin capitalisation rules do not apply to banking, insurance and notified non-banking financial companies in India. This relaxation is proposed to be extended to finance companies outlined in Regulation 2(1)(e) of the IFSCA (Finance Company) Regulations, 2021, from financial year 2024-25.
Clearing Corporations
The Government has proposed to amend Section 10(23EE) of the ITA, to widen the scope of exemption for specified income earned by Core Settlement Guarantee Funds (“CSGF”) from financial year 2024-25, which is currently available to CSGFs registered as clearing corporations with SEBI. This Budget extends this exemption to clearing corporations registered with the IFSCA, i.e. India INX and NSE IFSC under the IFSCA (Market Infrastructure Institutions) Regulations, 2021.
Venture Capital Fund (“VCFs”)
When an unexplained amount is credited in the books of a taxpayer, it is deemed as taxable income, under Section 68 of the ITA in certain cases. However, this provision is not applicable if the taxpayer is able to explain the nature and source of such amounts. The Finance Act, 2023, introduced a new requirement stipulating that loans, borrowings or other liabilities credited in the books of a taxpayer will be deemed explained only if the source of funds is satisfactorily demonstrated by the creditor/ entry provider. This requirement does not apply if the creditor is a well-regulated entity like a VCF registered with the SEBI. The proposed Budget extends this relaxation to VCFs based in IFSC from financial year 2024-25.
Variable Capital Company (“VCC”)
This Budget also seeks to obtain legislative approval for establishing pooled private equity funds through a VCC structure. A VCC is a new form of legal entity for all types of investment funds that can be formed as a single standalone fund, or as an umbrella fund with two or more sub-funds, each holding different assets and liabilities. Such assets and liabilities are ring-fenced from other sub-funds within the same structure and have no bearing on the gains or losses of other sub-funds. It enables fund managers and investors to spread risks across various sub-funds with a VCC, safeguarding and enhancing their investments. VCCs can distribute dividends from their capital. Foreign funds structured akin to VCCs can relocate to their preferred jurisdiction, if such relocation is facilitated in their framework.
This structure is prevalent in major financial hubs such as Singapore, Mauritius, Luxembourg, etc. Lastly, the VCC simplifies and reduces the cost of setting up a new fund by streamlining the process and making it more cost efficient. This will further help attract global players and provide domestic players with an at-par international jurisdiction, with business enabling regulatory regime.
Aircraft Leasing
India’s aviation sector is looking at unprecedented growth, and it is also the largest domestic market in the world. The government dreams of making GIFT IFSC an aviation hub and to do so, it has provided many incentives to lessors to set up in India. As per the Economic Survey 2024, the government is planning to foster aircraft leasing through GIFT IFSC. The VCC structure announcement is expected to act as a catalyst to establish GIFT IFSC as a world class aviation hub, with the promise of an efficient and flexible mode of financing for leasing of aircrafts. From an IFSC perspective, these moves are expected to boost the confidence of offshore bankers in the business of funding aircraft acquisition and leasing.
Ship Leasing
The Budget also promises reforms in case of ownership, leasing and flagging of ships as well as efficient and flexible mode of financing ship leasing. This will aid the ability to project the IFSC as the ‘new’ ship leasing hub, while retaining ownership of the ships within the country.
Others
Internationalisation of Rupee
This Budget re-emphasised on the efforts to internationalise the Indian Rupee. The government aims to simplify rules and regulations to promote foreign direct investment and overseas investment in India, with an aim to nudge prioritisation and promote opportunities for using the rupee as a currency for overseas investments. As a deemed offshore jurisdiction, GIFT IFSC can play a pivotal role in converting this into reality. GIFT IFSC can act as a conduit between the globe and India and help the country achieves the goal of rupee internationalisation.
Climate Financing
The Budget also announced plans to develop climate finance taxonomy to enhance capital availability for climate adaptation and mitigation, with the aim of supporting the country’s climate commitments and green transition, towards achieving its net zero targets. The 2023-24 Economic Survey observes that while foreign funding towards climate financing in India has increased, it’s still insufficient for the country to achieve its net zero goal. It is interesting to note that GIFT IFSC mandates climate financing for finance companies and banks in India, has an international sustainability exchange platform on NSE-IFSC and is aiming to become a hub for climate and transitional financing. Thus, GIFT IFSC can play a key role in routing climate financing funds from international markets to India.
WAY FORWARD
The Budget aims to bring more parity while facilitating a conducive regulatory and business environment in the IFSC, aligning with international standards and creating an ecosystem for undertaking niche financial activities. The suggested tax and non-tax reforms reemphasise the government’s aim to establish GIFT IFSC on the world map and as a global financial hub.
While we analyse the implications of the current Budget, clarifications from the government on family investment funds, reverse flipping of start-ups to GIFT IFSC, and the taxation of insurance proceeds in IFSC in the near future are still awaited.
For further information, please contact:
Ketaki Gor Mehta, Partner, Cyril Amarchand Mangaldas
ketaki.mehta@cyrilshroff.com
