Budget | Struggling GIFT City hopes for tax tweaks, incentives to get rolling

A decade and a half after its opening, Gujarat's GIFT City is nowhere near achieving the goals it had started with. Now, with Union Budget 2025 slated for Saturday (February 1), there is fresh hope that if Finance Minister Nirmala Sitharaman offers a bunch of incentives and tax tweaks, the GIFT City might make the cut as a global financial hub.

Investors, financial institutions and other stakeholders in the Gujarat International Finance Tech (GIFT) City are waiting for the Budget to address several critical issues. This, they feel, would attract more investors to GIFT City's International Financial Services Centre (IFSC).

Also read: Gujarat GIFT City: 16 years on, all glass and no girth

Tax disparity

“The 2024 Union Budget set a new course for GIFT City IFSC with decisions like aligning the tax treatment of Retail Schemes and Exchange Traded Funds (ETF) with Category III IFSC Alternate Investment Funds (AIF). But we also hoped for reforms such as the tax framework for Overseas Direct Investments by non-banking units and clarity on taxation of insurance proceeds in IFSC that were left out of the budget last year. This year we expect to get clarity on these issues,” said Jaimen Patel, Tax Partner-Financial Services, EY India located at GIFT City.

“Besides, there is another issue that the resident investors are now facing – a tax disparity between investing abroad via IFSC as compared to investing via global financial centres like Singapore and Mauritius. Currently, investing through GIFT IFSC means being taxed on accrued income at the Maximum Marginal Rate (MMR) of 40 per cent (plus surcharges). But if one uses the offshore funds, they are taxed upon income receipt or redemption. If this situation is resolved the GIFT IFSC will be more attractive to the investors as the IFSC funds will be brought in line with Singapore or Mauritius-based funds,” added Patel.

Global financial hub

Prioritising IFSC-GIFT City as a global financial hub and refining tax structures and regulatory frameworks are the primary demands at this stage to boost the fintech hub, claim the experts.

Also read: Gift City | Liquor permit does little for investments, but realty booms

Notably, a pre-budget report by Deloitte India proposes multiple incentives for the GIFT City IFSC. The report proposes a further concession on interest on green bonds listed exclusively on the GIFT IFSC exchange and cut it down to 5 per cent from the current 9 per cent. The proposal states that the initiative would not only support environmentally sustainable projects but also position the GIFT IFSC as a leading centre for green finance, attracting a niche segment of investors focused on responsible investing.

It further adds that there should be a clarity of the taxability of units set up in the IFSC after the expiration of the tax holiday period.

“As it is crucial for long-term planning and investment decisions, as it impacts the return on investment and the overall attractiveness of setting up operations in the IFSC,” read the Deloitte report.

Tax holidays

The report also proposes to extend tax holidays for offshore banking divisions, ship and aircraft leasing businesses and fund managers beyond March 2025 by at least five years and implement a 15 per cent income tax rate after the tax holiday period to enhance competitiveness.

“The IFSC-GIFT City provides an unprecedented opportunity to global investors to set up businesses in the areas of banking, insurance, capital market and asset management. But, there still some decisions needed on the tax and regulatory front for investors to consider presence in the fintech hub. Apart from the existing tax and regulatory advantages offered within IFSC-GIFT City, the fund management industry is expecting specific tax-related incentives for funds and fund managers in the upcoming budget,” Amit Kedia, a CA in GIFT City based Walker and Chandiok, told The Federal.

Also read: FM Sitharaman asks IFSC in GIFT City to set up platform for green credits to be traded

“In order to attract the offshore fund managers to migrate to IFSC GIFT City, we have recommended that the sunset clause which is currently March 31, 2025 (a provision in a law, regulation or contract that ends on a specified date) for relocation of offshore funds to IFSC-GIFT City be extended. Adding to that, concession in tax for individuals taking up employment in GIFT IFSC shall encourage individuals to migrate to the fintech hub. This will also help in solving the existing issue of not having enough manpower willing to relocate to the GIFT City,” he added.