By: Tracie Frost
In an effort to infuse cash into India’s economy and jump start the Make in India and Smart Cities initiatives, India’s Securities and Exchange Board (SEBI) last year codified guidelines for special international financial services centers (IFSC). In the 2016 budget, the Modi government took the move further by providing tax incentives aimed at attracting billions of dollars in financial services investment from global hubs like Dubai, Singapore, and Hong Kong. By some estimates, as much as US $30 billion per year worth of trading in rupee derivatives goes to locations outside India.
The idea of an international foreign services center in India has been a long time coming. IFSCs serve customers outside the domestic economy and handle cross-border financial products and services. Nearly a decade ago, the Ministry of Finance commissioned a report on making Mumbai an international foreign services center. However, the global financial crisis dampened those early plans. Now India is again looking at the benefits of opening the financial sector to greater foreign investment.
In 2015 SEBI paved the way for India’s first international financial services center when the body introduced relaxed rules for establishing stock exchanges and other capital market infrastructure. The new regulations treat any financial institution set up in the IFSC as a non-resident located outside India. Foreign companies may procure funds in foreign currencies by issuing and listing shares on the stock exchanges housed in the IFSC. In addition, capital requirements for IFSCs were also relaxed. Following the development, a special economic zone in the Gujarat International Finance Tec City, commonly referred to as GIFT, was created to house the nation’s first IFSC. In response, YES Bank and Federal Bank were quick to open IFSC banking units while other banks are in the planning stages of their own units.
In order to create more interest in the IFSC, the 2016 budget contains a slew of tax incentives:
- Exemption from long term capital gains tax on foreign currency transactions made on a stock exchange in IFSC.
- Minimum alternative tax rate reduced to nine percent on branches in IFSC that derive all their income from convertible foreign exchange.
- Tax exemption for the company paying the dividend and the payee on dividends distributed by branches located in IFSC that derive all their income from convertible foreign exchange.
- Exemption from securities transaction tax and commodities transaction tax on transactions undertaken in a foreign currency on recognized stock exchange in IFSC.
Some have wondered if these incentives are enough to bring significant foreign investment to India, given the scale of India’s infrastructural deficiencies and the problematic regulatory environment. Other global financial centers offer a rational legal regulatory framework, developed infrastructure, strategic location, and better tax benefits. Dubai’s IFSC has a zero tax rate while Malaysia’s is three per cent. Further, many global hubs have special regulations and an independent judicial system especially for IFSCs. Nevertheless, the Modi government’s attempts to create an environment that will lure global financial players to India is a noble one that may yet yield benefits. For one thing, in India’s restricted financial sector, an IFSC could serve as a trial run for Indian financial sector reform.
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