Legal Framework Underway to Establish India’s GIFT City as a Global Accounting Hub

Posted by Written by Naina Bhardwaj Reading Time: 8 minutes

GIFT City in the Indian state of Gujarat is poised to become a global accounting hub with a comprehensive legal framework in development. Key policy initiatives focus on insurance and reinsurance, leveraging the Indian International Bullion Exchange, efficient gold imports, niche sector expansion, and direct listing of Indian shares on IFSC exchanges. This emerging financial hub in India demonstrates innovation, regulatory flexibility, and increased trading activity.

In 2015, India marked a significant milestone with the inauguration of its inaugural International Financial Services Center (IFSC) within the Gujarat International Financial Tec-City (GIFT City). Situated near Gandhinagar, the capital of Gujarat state in India, this greenfield investment base set the stage for a transformative endeavor in the western state.

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In a recent strategic move set to reshape India’s financial landscape, Federal Finance Minister Nirmala Sitharaman has announced that a comprehensive legal framework is in the works to establish GIFT City as a thriving global hub for accounting and financial back-office functions. This framework will enable accounting, auditing, and taxation professionals to provide services from GIFT City.

During a recent review meeting focused on the growth and development of the GIFT City, Sitharaman outlined the following initiatives aimed at catapulting it onto the global stage:

  • GIFT City as a premier global hub for insurance and reinsurance: The IFSC Authority and the Insurance Regulatory and Development Authority of India (IRDAI) have been encouraged to proactively collaborate with leading global insurance firms. This initiative seeks to position GIFT City as a leading global hub for insurance and reinsurance, thereby drawing significant business opportunities and investments.
  • Leveraging the potential of the Indian International Bullion Exchange (IIBX): One of the key highlights of the vision to establish GIFT City as a financial hub is the maximization of the Indian International Bullion Exchange IFSC (IIBX), which was launched in 2022. Sitharaman emphasized the importance of leveraging IIBX’s potential for efficient price discovery and disintermediation.
  • Facilitating efficient gold imports and banking services: Addressing the Reserve Bank of India, Sitharaman proposed the piloting of tariff rate quota (TRQ) gold imports under the Comprehensive Economic Partnership Agreement (CEPA) with the United Arab Emirates (UAE) through IIBX. This strategic step is anticipated to pave the way for Indian banks to seamlessly utilize the IIBX platform, enhancing banking services.
  • Expansion into niche areas and infrastructure development: To expand the range of services available at GIFT City, there is significant potential for growth in emerging niche sectors such as logistics for precious metals, global insurance, and aircraft-and-ship leasing. The rapid progress in simplifying approvals and enhancing infrastructure development has attracted interest from global universities.
  • Direct listing of Indian shares on IFSC exchanges: The endorsement of direct listing of Indian shares on IFSC exchanges has received approval from the Government of India, aligning with efforts to boost the global visibility and attractiveness of GIFT City as a financial center.

Major boost to GIFT City IFSC in Union Budget 2023-24

The Union Budget 2023-24 introduced several key policy changes to enhance the growth and development of the GIFT IFSC (International Financial Services Centre) ecosystem. These changes include:

  • Delegation of SEZ Act powers to IFSCA: The powers under the Special Economic Zone (SEZ) Act, 2005, which entities in GIFT IFSC were previously required to obtain, will be delegated to the IFSCA (International Financial Services Centres Authority). This streamlines the regulatory process and strengthens IFSCA’s role as the unified financial services regulator for GIFT IFSC.
  • Single-window IT system: A single-window IT system will be established for registration and approval processes, involving IFSCA, SEZ authorities, GSTN, RBI, SEBI, and IRDAI. This move aims to significantly improve the ease of doing business in GIFT IFSC, potentially eliminating the need for separate No Objection Certificates (NOCs) from onshore regulators in India.
  • Recognition of offshore derivative instruments (ODIs): ODIs issued by Foreign Portfolio Investors (FPIs) in GIFT IFSC, regulated by IFSCA, will be recognized as valid contracts. This paves the way for offshore banking units (IBUs) of foreign banks in GIFT IFSC to issue ODIs backed by permissible Indian securities. Additionally, there will be tax relaxation for non-resident ODI holders, making it more attractive for IBUs to issue ODIs to their clients.
  • Extension of time for fund relocation: The budget has extended the time for tax-neutral relocation of funds from overseas jurisdictions into GIFT IFSC by another two years beyond the current deadline of March 31, 2023. This extension provides asset managers with more time to migrate existing offshore funds into the GIFT IFSC.
  • Acquisition financing by IBUs: IBUs of foreign banks in GIFT IFSC will be permitted to undertake acquisition financing. This opens up opportunities for foreign banks to provide financing for equity investments in domestic acquisitions, a capability not previously available due to Indian External Commercial Borrowings (ECB) regulations.

FAQ: GIFT City – India’s emerging financial hub

What is GIFT City?

GIFT City, short for Gujarat International Finance Tec-City, is India’s newest financial hub located between Gandhinagar and Ahmedabad in the state of Gujarat. It spans 886 acres and hosts companies like JPMorgan Chase and HSBC. The city offers an environment of reduced regulations and taxes to attract businesses and investments GIFT City is designed as a haven, offering companies the opportunity to function within a regulatory environment characterized by reduced red tape and bureaucracy. GIFT City’s overarching goal is to repatriate a substantial amount of funds to India’s onshore markets, establish a conducive “sandbox” for fintech innovation, and potentially influence the trajectory of India’s economic landscape.

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What makes GIFT City attractive to companies?

Operating as an IFSC, GIFT City constitutes a delineated jurisdiction providing financial services denominated in foreign currency. Within this innovative setting, entities operating within GIFT City are granted access to a robust regulatory framework that fosters an amicable business climate. This ecosystem offers a range of benefits, including tax exemptions, simplified cross-border transactions, and convenient currency conversion facilities, among other advantages.

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Companies are drawn to GIFT City due to its unique status as an experiment in free markets within India’s US$3 trillion economy. It offers various incentives and exemptions from rules and taxes that typically hinder business operations in the rest of India. These include a 100 percent tax holiday for ten years within the IFSC. The government is also making regulatory changes to encourage Indian companies to conduct activities like leasing ships and aircraft within GIFT City, bypassing foreign jurisdictions. Foreign universities will eventually be allowed to open campuses, and an international arbitration center aims to provide alternatives to India’s contract enforcement mechanisms. The goal is to encourage India-centric trading that has shifted to international financial centers like Dubai and Singapore to return to India.

What are the tax benefits offered to businesses in GIFT City?

Direct Tax Benefits in GIFT City

Units in the IFSC

Investors

100 percent tax exemption for 10 consecutive years out of 15 years.

Interest income paid to non-residents for money lent to IFSC units is not subject to taxation.

Minimum Alternate Tax (MAT) at nine percent of book profits for companies set up in IFSC. No MAT is applicable if the company opts for the new tax regime.

Transfer of specified securities listed on IFSC exchanges by a non-resident or Category III AIF located in IFSC is not considered a taxable transfer. Gains from this transfer are not subject to tax in India. Specified securities include various financial instruments.

Tax-neutral relocation of offshore funds to GIFT City is allowed for fund transfers occurring before March 31, 2025.

For long term bonds and rupee denominated bonds listed only on a recognized stock exchange in IFSC:

  • Issued before July 1, 2023: Taxable at a lower rate of four percent.
  • Issued on or after July 1, 2023: Taxable at a rate of nine percent.

Dividend received by a non-resident or foreign company from an IFSC unit is taxable at a rate of 10 percent plus applicable surcharge and cess.

Income earned by a non-resident from non-deliverable forward contracts, ODIs or over-the-counter derivatives entered with an IBU of an IFSC is exempt from tax.

Income received by a non-resident from a portfolio of securities, financial products, or funds managed by a portfolio manager on behalf of the non-resident, in an account with an IBU of an IFSC is tax-exempt as long as it accrues outside India and is not considered to arise in India.

 

Indirect Tax Benefits in GIFT City

Units in the IFSC

Investors

No Goods and Services Tax (GST) on services exchanged within IFSC, received by a unit in IFSC, or services provided from GIFT City to India.

No GST on transactions carried out in IFSC exchanges.

State subsidies on lease rental, provident fund contributions, and electricity charges.

Exemption for investors from securities transaction tax, commodities transaction tax, and stamp duty for transactions conducted on IFSC exchanges.

What financial services are offered at GIFT City?

GIFT City offers a wide range of financial services, which can be categorized into the following areas:

  • Banking: GIFT City hosts banking units of both Indian and foreign banks. Activities permitted for IBUs include opening foreign currency accounts for residents in India and abroad, accepting deposits, lending in the form of loans and trade finances, credit enhancement, credit insurance, and more.
  • Capital market: GIFT City provides capital market solutions and direct access to equity, commodities, and currency derivatives markets. Various capital market intermediaries, such as stock exchanges, commodity exchanges, clearing corporations, depositories, stockbrokers, investment advisors, portfolio managers, mutual funds, and more, can operate in GIFT City.
  • Fund Management: Fund Management Entities (FMEs) in GIFT City can launch different schemes, including venture capital schemes, restricted schemes for non-retail investors, retail schemes with a minimum size of over US$5 million, and special situation funds.
  • Insurance: Indian insurance companies and foreign insurers with approval from their home authorities can establish insurance offices in GIFT City. These offices can provide offshore direct insurance, offshore reinsurance, and insurance services to global subsidiaries of Indian conglomerates and individuals in offshore locations.
  • Financial company: Financial companies in GIFT City engage in core activities like lending, securitization, investment activities, and derivatives trading. Non-core activities include services like merchant banking, registrar and share transfer agent services, trusteeship services, investment advisory services, and portfolio management services.

What are the allied services available in GIFT City?

In addition to financial services, GIFT City also hosts various allied services, including:

  • Global in-house centers: Companies can establish global in-house centers to manage various business processes and operations.
  • Aircraft leasing and financing: Businesses can operate in GIFT City to tap into the demand for aircraft leasing and financing in one of the world’s fastest-growing aviation markets.
  • Bullion exchange: An international bullion exchange allows qualified jewelers to directly import gold through GIFT City, expanding India’s importer base.
  • Foreign universities: In the future, foreign universities will be allowed to open local campuses in GIFT City.
  • Ship leasing: GIFT City will soon accommodate ship leasing activities, further diversifying its range of services.

What kinds of companies are permitted to establish themselves within GIFT City’s financial sector?

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Entities such as banks, capital market intermediaries (stock exchanges, clearing corporations, etc.), fund management entities, insurance companies, financial companies, and more are permitted to operate in GIFT City’s financial sector, subject to regulatory guidelines.

What benefits does GIFT City offer to startups, particularly in the FinTech sector?

GIFT City provides several benefits to startups in the FinTech sector to encourage innovation:

  • Dedicated FinTech sandboxes: GIFT City has introduced dedicated FinTech sandboxes to promote the development of innovative ideas and solutions in the financial services market.
  • Recognition by DPIIT: FinTech startups and other entities recognized by the Department for Promotion of Industry and Internal Trade (DPIIT) can operate within the regulatory sandbox of GIFT City.
  • Live environment: The regulatory sandbox offers a live environment with a limited set of real customers for a specific timeframe. This allows startups to test their innovative financial solutions in a real-world setting without the full regulatory burden.
  • Multiple sandboxes: GIFT City offers various types of sandboxes for FinTech entities, including the IFSCA FinTech Regulatory Sandbox, the IFSCA FinTech Innovation Sandbox, the Inter-Operable Regulatory Sandbox, and an Overseas Regulatory Referral Mechanism. These sandboxes cater to different aspects of FinTech innovation and regulatory testing.

How does GIFT City support the delivery of financial services such as fund management and insurance?

GIFT City provides an enabling environment for fund management entities to launch various schemes, including venture capital, restricted schemes, and retail schemes, based on their license category. Additionally, it accommodates insurance offices for Indian and foreign insurers, allowing them to provide direct insurance for offshore business and offshore reinsurance business, subject to regulatory norms.

How does GIFT City address India’s currency-related challenges?

GIFT City aims to address India’s currency convertibility challenges by relaxing many of the rules that apply elsewhere in India. This enables onshore trading in key currency derivatives contracts, countering the trend of offshore trading in rupees and rupee-denominated assets.

How has GIFT City impacted financial trading and business activities?

Since the creation of the IFSC Authority in 2020 to streamline approvals and oversight, trading volumes in GIFT City have surged. Average daily turnover on stock exchanges increased significantly, as did cumulative derivative and banking transactions. Businesses and financial institutions are increasingly gravitating towards GIFT City for their operations.

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