Tax & regulations of GIFT IFSC - An Overview | DAIS 2024 | #taxation #taxbenefits #ifsc #giftcity

Summary

This video explains how India’s International Financial Services Centre (IFSC) attracts global fund managers by offering a competitive tax and regulatory environment. It covers the 2022 fund management regulations that allow a single IFSC fund-manager entity to run multiple funds and services, and outlines common structures—Category III AIFs, feeder funds, Category II AIFs, stressed-asset vehicles, and fund-of-funds. Key benefits include broad investment flexibility, exemptions on non-equity capital gains, a flat 10% tax on dividend/interest, a 10-year tax holiday for fund managers, no GST on fees, no PAN or tax filings for many foreign investors, lower operating costs, and streamlined fund relocation into IFSC.

Takeaways

• 😀 The IFSC (International Financial Services Centre) was established to attract foreign investors and encourage global fund managers to set up operations in India.
• 😀 More than 100 funds have been set up in the IFSC with a commitment of over $20 billion as of September, and the number continues to grow.
• 😀 The regulatory and tax framework for funds in the IFSC is designed to be comparable with global fund regimes, making it an attractive investment destination.
• 😀 Fund managers in the IFSC can register as a single entity to manage multiple funds, offer portfolio management services, and provide investment advisory, with a light-touch regulatory approach for larger investors.
• 😀 Funds in the IFSC can invest across a wide spectrum of securities, including Indian, IFSC, and foreign securities, with flexibility for non-retail and accredited investors.
• 😀 There are tax exemptions for capital gains on non-equity securities, such as debt, derivatives, and securities receipts, when investing through IFSC funds.
• 😀 Foreign investors in IFSC funds benefit from no requirement to obtain a Permanent Account Number (PAN) or file Indian tax returns, which simplifies compliance.
• 😀 Fund managers in the IFSC enjoy a 10-year tax holiday, with exemptions from GST on management fees, performance fees, and other variable returns.
• 😀 Specific tax advantages include a lower tax rate of 10% on dividends and interest income and capital gains exemptions on foreign securities.
• 😀 Investors in Category 3 AIFs (Alternative Investment Funds) or feeder funds in the IFSC can enjoy tax exemptions and lower tax rates, which may be more attractive compared to domestic funds in India.

Q & A

What is the purpose of setting up the International Financial Services Centre (IFSC) in India?

The IFSC was primarily established to attract foreign investors, particularly those with a presence in locations like Singapore and Mauritius, to set up operations in India itself. The goal is to provide a favorable regulatory and tax environment to encourage investment and fund management within India.

How many funds have been set up in the IFSC as of September, and what is the committed capital?

As of September, over 100 funds have been set up in the IFSC, with a total committed capital of more than $20 billion. This number continues to grow as more funds and investors engage with the IFSC.

What are some of the key sectors and services offered by the IFSC ecosystem?

The IFSC ecosystem includes a wide range of services such as banking, brokerage, capital markets, insurance broking, and finance companies. It also includes critical infrastructure like fund registrars, fund accountants, and fund administrators.

What is the significance of the Fund Management Regulations introduced in 2022?

The Fund Management Regulations introduced in 2022 allow a single fund manager entity to handle multiple activities such as managing different funds, offering investment advisory, and portfolio management, under a single registration. This streamlines operations and reduces regulatory complexity.

What are the investment restrictions for Indian resident investors in IFSC funds?

Resident Indian investors face certain restrictions when investing in IFSC funds. They cannot invest back into India through these funds, and investments must be made under the Liberalized Remittance Scheme (LRS) or the Overseas Portfolio Investment (OPI) route, with limits based on their net worth.

How does taxation work for non-equity gains in IFSC-based funds?

Non-equity gains, including income from debt, derivatives, and other non-equity securities, are completely exempt from capital gains tax in India for funds set up in the IFSC. This tax exemption applies even to foreign securities such as U.S. stocks or bonds.

What are the tax benefits for fund manager entities operating within the IFSC?

Fund manager entities in the IFSC benefit from a 10-year tax holiday on income, with the ability to choose a continuous 10-year block within the first 15 years. Additionally, there is no GST on management fees, performance fees, or variable returns, making the IFSC a highly attractive location for fund management.

Can a fund manager entity in the IFSC manage both domestic and international funds?

Yes, a fund manager entity in the IFSC can manage both domestic and international funds. The entity can also offer portfolio management services to foreign investors, facilitating a wide range of investment opportunities.

What are the key advantages of establishing a feeder fund in the IFSC to invest in a domestic mutual fund?

Setting up a feeder fund in the IFSC provides tax exemptions on capital gains for non-equity investments and lower tax rates on dividend income (10%). This structure allows foreign investors to avoid PAN and tax filing requirements, making it an efficient investment vehicle.

What options are available for relocating funds to the IFSC from other jurisdictions?

The government has allowed the relocation of funds from offshore jurisdictions (like Singapore or Mauritius) to the IFSC, with a deadline of March 31, 2025. The relocation is tax-free, meaning there are no tax or transaction costs for transferring securities to an IFSC-based fund, and any existing tax exemptions (e.g., grandfathering benefits) continue.