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While presenting the Union Budget for the financial year 2015-16, the then finance minister (the late Arun Jaitley) recognized the fact that, despite producing some of the brightest financial minds, India struggled to exploit this talent to its advantage. Logically, it followed that the country would not be able to compete with other jurisdictions, such as Singapore or Dubai, which had set up international finance centers. Accordingly, he proposed establishing an International Financial Services Center (IFSC) in Gujarat—the Gujarat International Finance Tec-city (popularly known as “GIFT-City”).

The vision then was to invite banks, capital market participants and insurance players to set up operations there. The IFSC would be established under the Special Economic Zones Act, 2005, which regulates free trade zones and their special tax and legal privileges.

Relaxing Regulations for Entities Established in IFSCs

Shortly after the budget announcement, India’s securities market regulator, the Securities and Exchange Board of India (SEBI), announced enabling guidelines for entities setting up in an IFSC. Broadly speaking, compared to existing stringent securities market requirements, a more relaxed regulatory regime would be offered to entities such as stock exchanges, clearing corporations, depositories, and intermediaries, to encourage them to set up operations.

In order to clarify terms such as “residential status” and “operating currency,” the exchange control regulator, the Reserve Bank of India (RBI), issued regulations providing that institutional participants in IFSCs would be regarded as nonresidents and permitted to conduct business in foreign currency.

As there are separate regulatory mechanisms for the banking, capital markets and insurance sectors in India, it was recognized that, to ease approvals and streamline compliance issues, a single regulator for GIFT-City would be required. Accordingly, the International Financial Services Centers Authority (IFSCA) was established in 2020 to perform the role of a super regulator. The immediate impact of this move was evident, as in the month of April 2021 alone, about 25 companies lined up investment proposals in the IFSC.

In the meantime, the SEBI issued operational guidelines providing that registered foreign portfolio investors (FPIs) would be permitted to operate in IFSCs without undergoing any incremental approval process. However, the guidelines mandate that such FPIs are required to segregate funds and securities. In terms of offerings by global market participants, apart from those already permitted outside of an IFSC, certain additional offerings such as rupee derivatives and depository receipts were permitted. They also included the setting up of International Bullion Exchanges in an IFSC.

Tax Treatment of Transactions Linked to IFSCs

To compete with other global financial hubs, several tax incentives have been offered to IFSC participants, as well as to nonresident investors and business partners. These tax exemptions have been divided into two categories:

Income Tax

Unit of IFSC

  • A 100% tax holiday on profits for a continuous period of 10 out of 15 years, beginning with the year in which the requisite permission for the operation of the IFSC unit (the term used by the IFSC regime for approved entities) applies (see Income Tax Act, 1961, section 80LA);
  • Minimum alternative tax is payable at a reduced rate of 9% (see Income Tax Act, 1961, section 115JB);
  • A capital gains tax exemption for gains arising from bonds, global depository receipts, rupee-denominated bonds of Indian companies, derivatives, and certain other specified securities such as Category-III Alternative Investment Funds received by an investment division of an offshore banking unit, subject to the investments being made in foreign currency and transacted on a recognized stock exchange located in an IFSC (see Income Tax Act, 1961, section 47(viiab) and notification dated March 5, 2020);
  • Apart from the 100% tax holiday mentioned above, a special tax regime applicable to nonresidents is available to a unit located in an IFSC. This includes a concessional rate of withholding tax for certain interest income earned by nonresidents, additional deductions in respect of the computation of interest and a relaxation in compliance requirements;
  • The condition that in order for the concessional tax rates of 15% (for new domestic manufacturing companies) and 22% (for domestic companies) to apply a company must not claim certain deductions (e.g., accelerated depreciation, weighted average deduction, etc.) does not apply to a unit in an IFSC, which can opt for such lower tax rates and claim a tax holiday;
  • The special tax regime that applies to FPIs in respect of income from securities or capital gains arising from the transfer of securities has been extended to the investment division of offshore banking units (see Income Tax Act, 1961, section 115AD);
  • Any income arising from the transfer of aircraft and helicopters (including engines or any part thereof) leased by a unit in an IFSC is eligible for a tax holiday deduction (see Income Tax Act, 1961, section 80LA).

Exemptions for Nonresident Investors of IFSC Units

  • Capital gains arising from bonds, global depository receipts, rupee-denominated bonds, derivatives, and other specified securities, such as Category-III Alternative Investment Funds received by an investment division of an offshore banking unit;
  • Income arising from the transfer of non-deliverable forward contracts entered into with an offshore banking unit of an IFSC;
  • Interest income relating to loans offered to a unit in an IFSC in respect of transactions from Sept. 1, 2019, onward (see Income Tax Act, 1961, section 10(15)(ix));
  • Withholding tax on interest income arising on long-term bonds or rupee-denominated bonds listed on a recognized stock exchange in an IFSC is chargeable at the reduced rate of 4% (subject to a sunset clause of June 30, 2023) (see Income Tax Act, 1961, section 194LC);
  • Royalty and interest income arising out of lease rentals of aircraft/helicopters paid by a unit in IFSC to a nonresident. Such exemptions are also available if the lease was related to engines of such aircraft/helicopters or any other part.

Other Taxes

For foreign currency transactions carried out on recognized stock exchanges in an IFSC, transaction costs such as stamp duty, securities transaction tax, and commodities transaction tax do not apply.

Goods and Services Tax is not applicable on services received and provided to/for offshore clients located in an IFSC.

Encouraging Foreign Funds to Set Up in an IFSC

To promote the relocation of foreign funds to IFSCs, the Indian Finance Act, 2021 introduced a scheme, with effect from April 1, 2022, for the relocation of Alternative Investment Funds in India. Such funds, together with their shareholders, have been provided with a tax neutrality status, subject to the condition that they derive no incremental benefit during the relocation. For eligible investment funds or fund managers wanting to set up operations in an IFSC, the Finance Act, 2021 provided that further conditions would be relaxed in relation to the existing ordinary conditions prescribed wherein the fund management activity carried out would not constitute a business connection in India.

Tax and Regulatory Changes Proposed by the Union Budget 2022

To further the objective of promoting and establishing IFSCs as global financial services hubs, the Union Budget 2022 has proposed further measures and exemptions. In this regard, the following will be exempt:

  • income of nonresidents arising on account of the transfer of offshore derivative instruments and over-the-counter derivatives entered into with an offshore banking unit located in an IFSC (see Finance Bill, 2022, clause 4(a)(i));
  • income arising to nonresidents from portfolio investments and financial products, managed or administered by portfolio managers in an offshore banking unit located in an IFSC (see Finance Bill, 2022, clause 4(a)(iii)).

To promote the setting up of ship leasing, the budget has proposed (see Finance Bill, 2022, clause 4(a)(ii)):

  • exemption of royalty and interest income paid by a unit in an IFSC to nonresidents on account of leasing ships/ocean vessels (including engines or any part);
  • capital gain income arising to a unit in an IFSC from the transfer of a ship/ocean vessel (including engines or any part) which was earlier provided on lease to a person to be eligible for tax holiday deduction.

Further, the budget proposes that the anti-abuse measures in section 56(2)(viib) of the Income Tax Act, 1961, which apply where a private company issues shares to an Indian resident and receives consideration for them that exceeds their fair market value, will not apply to Category I and Category II Alternative Investment Funds, as regulated by the IFSCA (see Finance Bill, 2022, clause 16(a)).

In terms of regulatory announcements, the budget has announced that world-class foreign universities and institutions will be set up to offer courses in GIFT-City, free from domestic regulations (apart from those issued by the IFSCA), that will facilitate the availability of high-end human resources for financial services and technology. Also, for the settlement of disputes, the establishment of an International Arbitration Center has also been proposed.

Recent Developments in GIFT-City IFSC

The BSE’s India International Exchange (India INX), established in GIFT City, reported that its cumulative total trading turnover exceeded $500 billion in 2019, driven by a substantial jump in trading volume that grew to over 37.15 million contracts. In the same year, the Singapore Exchange (SGX) entered a collaborative agreement with India’s National Stock Exchange (NSE) whereby the Nifty trading taking place in Singapore will be routed to NSE’s subsidiary in GIFT-City, where the trades will be executed and settled.

In terms of offerings on the INX, in 2019 Adani Green Energy issued green bonds worth $500 million on the Global Securities Market, the exclusive green listing and trading platform of INX for fundraising and trading exclusively in green, social and sustainable bonds. In 2020, the Asian Development Bank listed its 10-year masala bonds worth 850 crore Indian rupees ($114 million) on INX’s global debt listing platform. In 2021, HDFC Bank listed its $1 billion additional tier-1 bonds and Indian Oil listed its foreign currency bonds, worth $1.4 billion and 400 million Singapore dollars ($297.6 million), on the IFSC exchanges in GIFT City.

In the same year, Ireland’s Acumen Aviation, India-based Vman Aero, financing services company Investec and business charter operator JetSetGo expressed interest in starting aircraft-leasing businesses in GIFT City. SpiceJet also planned to lease seaplanes from India through an IFSC and Hindustan Aeronautics Ltd explored the possibility of entering into a leasing agreement with Alliance Air for two Dornier aircraft through the IFSC route.

In the banking sector—apart from Indian banks (e.g., State Bank of India, Bank of Baroda, ICICI Bank, Axis Bank, Kotak Mahindra Bank, HDFC Bank)—foreign banks such as HSBC, Standard Chartered, Barclays Bank, Deutsche Bank, and Citibank have set up banking units in an IFSC. The total banking transactions have crossed the $100 billion mark since the setting-up of the IFSC.

To achieve the objective of IFSCs being centers of high-end data processing, the GIFT-City IFSC has a free trade zone for housing vaults, which enables entities to set up precious metals testing laboratories and refining facilities.


The changes being carried out to the IFSC regime are going in the right direction and will help India to achieve its target of becoming a $5 trillion economy by the financial year 2026-27. The changes proposed in the Union Budget 2022 will make the IFSC more lucrative for offshore funds and will go a long way toward realizing the original vision of the IFSC, namely to make India a dream destination for financial institutions.

Mukesh Butani is Managing Partner and Shankey Agrawal is a Partner at BMR Legal.

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