Budget sets new course for GIFT City IFSC

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Extending a slew of incentives to the International Finance Services Centre (IFSC) at GIFT City in Gujarat, the Union Budget not only adds to the “ease of doing business” within the IFSC, but also provides more clarity, allowing exemptions for retail and exchange traded funds, that are on a par with Alternate Investment Funds and other existing funds, say experts.

“The Budget has provided clarity related to mutual funds and exchange traded funds. Now, they will be treated as a specified fund, which means they will enjoy the same exemptions that funds in other categories enjoy. Now this part of the industry will kick-start, where the focus will be on NRIs and foreigners,” K Rajaram, chairperson of the International Financial Services Authority (IFSCA) told businessline after the Finance Minister presented the Budget.

Specified funds will now include funds established or incorporated in India in the form of a trust or a company or a limited liability partnership or a body corporate, which have been granted a certificate as a retail scheme or an Exchange Traded Fund and are regulated under the International Financial Services Centres Authority (Fund Management) Regulations, 2022, made under the International Financial Services Centres Authority (IFSCA) Act, 2019, stated the budget.

The Finance Minister also said the required legislative approval will be sought to provide an efficient and flexible mode of financial leasing of aircraft and ships, and pooled funds of private equity through a ‘variable company structure’. Welcoming the move, the IFSCA chairman said, “The variable company structure is usually seen in financial centres such as Singapore, Luxembourg, Mauritius, and others. This structure provides ease of doing business. In IFSC currently, each fund formed is registered as a trust. So for every fund, a separate trust has to be created. Whereas in a variable company, multiple funds can be created within the same structure and these funds can be firewalled from each other. This makes creation of new funds a lot easier and less costly. For this, a legislation amendment will be moved by the government.”

There is an existing provision in IFSC where unexplained cash credit can be questioned for any Venture Capital Fund (VCF) investing in Indian start-ups. The budget exempts a VCF located in IFSC — extending a loan / other amount to an assessee — from being summoned to explain the source of funds. Officials said this exemption is in place for a Venture Capital Fund (VCF) or Venture Capital Company (VCC) registered with SEBI.

Jaiman Patel, Tax Partner, Financial Services, EY India, said despite the Budget announcements, anticipated reforms such as the tax framework for ODIs by non-banking units, reverse flipping of start-ups to GIFT City IFSC, clarity on taxation of insurance proceeds in IFSC, etc, are pending. “The Budget has set a new course for GIFT City IFSC, aligning the tax treatment of Retail Schemes and ETFs with Category III IFSC AIFs. It will attract global fund managers and boost the fund management ecosystem. Announcements for a ‘variable company structure’ and efficient funding mechanism for finance lease of aircrafts and ships, promise enhanced financial and operational flexibility to the GIFT City ecosystem,” Patel added.

Siddarth Pai, Founding Partner, 3one4 Capital, & Co-Chair, Regulatory Affairs Committee, IVCA (Indian Private Equity and Venture Capital Association) said, “AIFs in GIFT IFSC can look forward to a Variable Capital Company (VCC) Structure, a globally recognised and accepted vehicle for investment funds. Trusts were not conceived for the complex operations of VC/ PE funds and the VCC structure will make GIFT IFSC even more attractive.’

“Section 68 exemption to GIFT IFSC AIFs, on par with SEBI AIFs, is a welcome move. Section 68 seeks to tax unexplained cash credits and was linked to the Angel Tax section. The lack of exemption to GIFT IFSC AIFs was an oversight, which has been rectified,” Pai added.