India: Tax Exemptions for Offshore Fund Management and Offshore Banking at IFSC|Union Budget 2022
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Since 1991, India has made serious progress towards the policy of economic liberalization and towards providing clear and navigable ways to invest in the country. The government has launched several investment-friendly initiatives as it recognizes the importance of making India an attractive hub for investment from individuals, both domestic and foreign. Some steps involved offering special privileges such as tax exemptions, healthy business ecosystems, and access to one of the largest consumer bases in the world.
The statistics reflect the effectiveness of these measures. According to reports, India attracted foreign investment of up to USD 81.72 billion in the financial year 2020-2021 – a figure 10% higher than the previous year. To do so at the height of the pandemic is certainly indicative of a global economic shift away from China and, moreover, of the generous investment policies offered by India. The main contributors to foreign direct investment (FDI) are Singapore and the United States and the states that attracted the most investment were Gujarat, Maharashtra and Karnataka. The government is keen to develop these figures and one of the proposed measures is the development of GIFT City and IFSC (Indian Financial System Code) in Gujarat.
What is GIFT City?
The City, which is still in development, is supposed to be the next big world financial center, just like New York or Singapore. The idea has been in development for over a decade now. The City aims to focus on the integrated development of 886 acres with 62 million square feet of built-up area constituting 67% commercial space, 22% residential space and 11% social space.
1 It will notably consist of a suitable Multi-Services SEZ and an exclusive Domestic Tariff Zone (DTA).
What is the IFSC?
An IFSC (International Financial Service Centre) is a jurisdiction providing financial services to residents and non-residents, in foreign currencies. Gujarat IFSC is the multi-service SEZ (Special Economic Zones) of GIFT city, which is located to provide easy access to the Indian economy. In January 2017, Indian Prime Minister Narendra Modi inaugurated India’s first international exchange at IFSC. This exchange includes trading on all
asset classes such as stocks, currencies, commodities and fixed income securities. The GIFT City SEZ is the only place in India to be designated as an IFSC and the IFSC is India’s first offshore financial center. Currently, there are over 125 licensed financial entities within the IFSC. Over the years, he has witnessed dozens of vital regulatory developments such as the issuance of IFSC Operational Guidelines for Indian and Foreign Insurers by IRDAI (Insurance Regulatory and Development Authority) in 2017, until the establishment of the first international bullion exchange in India in 2020. and the publication of the framework for aircraft operating leases by IFSCA in 2021. It also offers demarcations for domestic and oriented units towards export; resident individuals are allowed to invest in foreign securities through IBUs. Recently, additional light has been shed on the status of tax exemptions for offshore funds management and offshore banking services at the IFSC in the Union Budget 2022. The Minister of Finance highlighted, via the following points discussed below, that the IFSC intends to provide a highly competitive cost of operations with various tax benefits, one-stop clearance and CSR reliefs under various company law provisions.
Income tax exemptions to promote offshore banking, vessel leasing and other financing
The tax incentives offered by the government are intended to promote various business activities such as ship leasing and financing, offshore fund management and offshore banking in GIFT City. The Union budget aims to ensure that a non-resident’s income from offshore derivatives or OTC derivatives issued by an offshore banking unit, royalty and interest income under the rental of a vessel and income received from IFSC portfolio management services will be exempt from taxsubject to specific conditions.
Highlights in brief:
- Section 10(4E) of the Income Tax Act 1961 (Computers Act) provides tax exemptions on income arising from/derived from/or received by a non-resident as a result of the transfer of contracts non-deliverable forward contracts entered into with Offshore banking unit (OBU) of an IFSC. [This exemption is not extended
to income accrued or arisen to or received by a non-resident as a
result of the transfer of ‘offshore derivative instruments’
or ‘over-the-counter derivatives’ entered into with an OBU
of an IFSC.]
- Section 10(4F) of the Information Technology Act provides tax exemption on royalty and interest income of a non-resident on the lease of an aircraft if paid by a unit in IFSC.
- Phone tax exemptions are also extended to royalty and interest income of a non-resident on the rental of a “vessel” if paid by an IFSC unit. (A “vessel” means a ship or an ocean-going vessel, a ship’s engine or an ocean-going vessel, or any part thereof.)
- In addition, article 80-LA of the computer law provides for the deduction of certain income of an IFSC unit for 10 years out of the 15 years. This deduction is offered extended to income from the transfer of assets being a “vessel” that has been leased by an IFSC unit to any person.
- It is proposed to introduce Section 10(4G) to provide exemption on the income of a non-resident from a portfolio of securities or financial products or funds, managed or administered by a portfolio manager on behalf of that non-residentin an account held with an OBU in an IFSC, to the extent that such income is sourced or generated outside India and shall not be deemed to be sourced or generated in India.
- Deemed gifts rules under section 56(2)(viib) of the IT Act does not apply to excess share premium received by an Indian company from a Class I or Class II alternative investment fund governed by the International Financial Services Center Authority Act 2019.
IFSC AIF: simple vanilla structure
Impact and prospects
These measures should give offshore fund managers enough leeway to structure funds based on negotiations with investors to improve returns. The tax incentives provided in the IFSC would encourage foreign investment in the financial services sector in India and improve transactions with the OBUs set up in the IFSC. The incentives for aircraft leasing business in the IFSC had been very successful with many aircraft leasing companies locating in the IFSC. Offering similar incentives to vessel leasing operations should have the same result.
The government regularly offers tax incentives to encourage the establishment of units within the IFSC, which is currently located in the city of GIFT. Continuing this trend, the Union budget for 2022 also provided
a plethora of proposals aimed at providing incentives to units settling and doing business in the IFSC. The creation of state-of-the-art infrastructure would further strengthen this initiative. Granting tax exemptions on various instruments issued by OBUs would attract non-residents to invest in India, thereby strengthening India’s financial services sector. The incentive for “vessel” leasing activity would incentivize shipping companies to conduct vessel leasing through the IFSC, unlike any other foreign jurisdiction with which India has a favorable tax treaty.
The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.
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