Why Foreign Portfolio Investors May Soon Prefer India’s GIFT IFSC Over Traditional Investment Routes

Posted by Written by Archana Rao Reading Time: 4 minutes

India’s GIFT City is gaining traction among foreign portfolio investors, who are opting for it over traditional investment routes via Mauritius or Singapore. This shift is primarily attributed to the tax benefits and improved ease of doing business in GIFT City compared to other common investment channels.

India’s first operational International Financial Services Centre (IFSC), the Gujarat International Finance Tec-City, or GIFT City, offers lucrative tax benefits backed by a robust legal and regulatory framework, which has enhanced its appeal among foreign portfolio investors (FPIs). Since the introduction of specific regulations for managing funds in 2022, there has been promising investment growth year-on-year.

GIFT City aspires to become a worldwide center for finance and technology, drawing companies from a variety of sectors, including capital markets, fintech, IT, banking, insurance, and more.

Strategic benefits for international businesses

In GIFT IFSC, industries such as international banking, stock markets, fund management, and aircraft leasing have all seen significant growth. The location is now home to almost 200 businesses, including many brokerages and financial service providers, 25 insurance organizations, and 19 banking branches. Important organizations have set up shop at GIFT City, including the Bombay Stock Exchange (BSE), National Stock Exchange (NSE), and foreign banks Standard Chartered, State Bank of India, Dual, and JP Morgan.

The GIFT City can be categorized into two sections:

  1. A domestic tariff area (“GIFT DTA”), governed by domestic laws; and
  2. A multi-service special economic zone (“GIFT SEZ“), comprising an International Financial Service Centre (“GIFT IFSC”) that is globally benchmarked, as well as IT & ITeS and other export services.

Significant tax breaks are available to IFSC units, including a 100 percent tax exemption for 10 of the 15-year block period. In addition, there is no goods and services tax (GST) or Securities Transaction Tax (STT) on transactions made on IFSC exchanges, meaning that interest income given to non-residents on money lent in GIFT City is not subject to taxation. Businesses establishing their operations in the GIFT City benefit from additional incentives such as exemptions from stamp duty and registration fees.

Competitive position against global financial centers

The units established in GIFT City are essentially offshore financial centers that serve clients who are not within their own jurisdiction. Legal experts and industry players say that the Indian government is pushing GIFT City over common investment channels through Mauritius, Singapore, the Netherlands, or Luxembourg by offering tax breaks and improved metrics for ease of doing business. 

In March 2024, India made amendments to the Double Taxation Avoidance Agreement (DTAA) with Mauritius and introduced the Principal Purpose Test (PPT) to address treaty abuse, particularly affecting Mauritius-based funds. According to the change in the agreement, funds with their headquarters in Mauritius that made investments in India before the deadline but haven’t yet sold them must present proof of “substantiation.” They have to verify whether these funds conducted legitimate commercial operations in the island nation of Mauritius and provide an explanation for why the jurisdiction of Mauritius was chosen.

Experts note that India’s aggressive push to introduce GIFT City’s tax-free provisions has posed challenges for FPIs using Mauritius for investment. Even though international destinations like Singapore and Dubai are mature financial centers, many individuals looking to optimize their operational flexibility and financial efficiency will find GIFT City to be a more attractive alternative due to its cheaper costs.

SEBI makes investments easier for NRIs

In May 2024, it was announced that the Securities and Exchange Board of India’s (SEBI) will allow for higher investments from Non-Resident Indians (NRIs) and Persons of Indian origin (PIOs) in FPIs based in GIFT City, thereby further boosting its appeal. The market regulator announced its decision to increase the exposure of passive funds to group firms and to let NRIs own 100 percent of global funds in the location. So far, the rules meant that the maximum combined holdings of NRIs and Overseas Citizen of India (OCIs) in a global fund had to be less than 50 percent and that of a single OCI or NRI was capped at 50 percent.

Under the new regulations, they would now be able to fully own global funds at GIFT City, provided they comply with specific documentation requirements, including submitting copies of their PAN cards and disclosing their economic interests in the FPI (see Circular issued by the IFSCA dated May 2, 2024 here).

Challenges – approvals process, clarity needed on treaty-linked benefits

SEZ authorities and the IFSCA require separate approvals for units in GIFT City. For firms, this dual clearance process may result in delays and duplication of the process. Financial experts in India recommend that the national government look into implementing a single approval method in order to reduce waiting times and remove process duplication. Further, policymakers have been urged to pay urgent attention to infrastructure challenges and talent shortages in the area.

Moreover, although GIFT City offers assured tax benefits backed by regulatory updates, there is a need for more clarity on certain tax implications for investors.

Following the amendment to Section 18A of the Securities Contracts (Regulation) Act, 1956, after last year’s federal budget announcement, Offshore Derivative Investments (ODIs) issued in GIFT-IFSC by FPI investors are recognized as valid contracts. Initially, this privilege was extended to IFSC banking units registered with SEBI as FPIs. Now, as part of the second phase, IFSCA permits non-bank entities registered with SEBI as FPIs to issue derivative instruments with Indian securities as underlying assets in GIFT-IFSC (See Circular from the IFSCA dated May 2, 2024 here).

ODIs, also known as participatory notes (P-notes), offer significant confidentiality benefits, which are highly appealing to investors. When combined with the leverage allowed at GIFT City, ODIs can drive increased trading volume among GIFT-IFSC FPIs. This could attract investors who are considering rerouting their FPIs from Mauritius. However, if a DTAA amendment requires disclosure of investment purposes, P-notes still offer anonymity. Investors from Mauritius must decide whether to comply with the DTAA amendment’s disclosure requirements or take advantage of the confidentiality provided by P-notes. The process for tax gain disclosure under the DTAA amendment is yet to be clarified.

Key takeway

While GIFT-IFSC is still developing into a premier financial hub, it has sparked a broader call for increased innovation and advancement in India’s financial sector. It is steadily evolving into a prominent center for international finance and technology, offering significant benefits such as tax exemptions, regulatory ease, and strategic advantages for global businesses. Despite challenges like the need for greater clarity in tax agreements and a more streamlined approval process, GIFT City’s competitive incentives and growing infrastructure position it as an increasingly attractive alternative to established financial centers.

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