International Financial Service Centre (IFSC): Propelling India’s aspiration in Amrit KalM

International Financial Service Centres (IFSC) is one of the major initiatives taken by the Indian Government to attract foreign direct investment (FDI) and to make India a hub for financial activities. The IFSC was set up as a unit within a Special Economic Zone (SEZ) framework, which conferred it the status of foreign territory status. This allows special tax and regulatory laws applicable to the IFSC. Since an IFSC mostly interacts with non-residents, various exchange control laws are also not applicable to it. Over the years, various amendments have been made to taxation and regulatory laws with the objective of making the IFSC more appealing to foreign financial institutions to set up shops in the IFSC. 

In the last year’s budget, the Government announced several tax measures for Foreign Institutional Investors (FIIs), including, exempting the income of non-residents arising on account of the transfer of specified instruments with an offshore banking unit (OBU) located in the IFSC. Similarly, an exemption was granted for income arising to non-residents from portfolio investments, and financial products are managed by portfolio managers in an OBU located in an IFSC. Exemptions were also provided to promote the setting up of ship leasing services in an IFSC. Continuing with the objective to offer a lucrative tax and regulatory environment, Budget 2023 has made major regulatory changes.

Removal of dual regulation

In this Budget, Finance Minister has proposed that International Financial Services Centre Authority (IFSCA) which is the super regulator for the IFSC in India, shall also exercise powers under the Special Economic Zone Act, 2005. This is a major step since this removes the dual authority of IFSCA and SEZ Authority. IFSC was established under Section 18 of the Special Economic Zone Act, 2005. It is a specialized unit within the notified SEZ; hence, the SEZ Authority also exercises jurisdiction over the area. SEZ is under the administrative control of a Development Commissioner, and any person who wishes to establish a unit within SEZ that includes an IFSC unit must take approval from the Unit Approval Committee headed by the Development Commissioner. Thus, SEZ Authority and IFSCA exercised dual control over units in IFSC. Having a unified or single regulator for IFSC could contribute to better regulation and supervision of financial entities in the IFSC. This will go a long way in enhancing the ease of doing business, tax certainty and building investors’ confidence in IFSCA. Further, the IFSC Act has been proposed to be amended to introduce statutory provisions for arbitration and other ancillary services. 

Single Window Clearance

A similar measure has been proposed by the Budget 2023, which facilitates setting up single window IT system for registration and approval from IFSCA, SEZ Authorities, Goods & Services Tax Network (GSTN), Reserve Bank of India (RBI), Securities and Exchange Board of India (SEBI) and Insurance Regulatory and Development Authority of India (IRDAI). A single window clearance for IFSC would ease the approval and streamline compliance for an IFSC. Thus, from a regulatory perspective, the Government has been taking concrete measures to promote and bring IFSC to par with other global financial centres such as Singapore.

Tax measures

On the tax front, several exemptions are granted through successive Union budgets to IFSC Units and foreign investors.  A 100% tax holiday is available 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 Minimum alternative tax (MAT) is payable by an IFSC Unit at a reduced rate of 9%. Further, any 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 offshore banking unit, are completely exempted. In the Finance Act, 2021, various provisions of the Income Tax Act were amended to facilitate tax neutrality with respect to the relocation of offshore funds to the IFSC. 

Continuing this trend, the Budget 2023 has proposed the removal of double taxation of income distributed by offshore derivative instruments (ODI) entered with an OBU. Till now, exemption from tax was accorded only to transfer of ODIs and not to the distribution of income. Resultantly, the income earned by the IBU on such investments was taxed as capital gains, interest, and dividends both at the hands of IBU and again when distributed to non-resident ODI holders. The Finance Bill 2023 proposes to substitute Section 10(4E) of the Income-tax Act, 1961, exempting income arising on the transfer of ODI and distribution of income on ODI with are entered with OBU operating in IFSC.

The above move is against the backdrop of the recent collaboration of the National Stock Exchange (NSE) and the Singapore Exchange to facilitate stock-based index trading in India. Last year in July 2022, NSE IFSC-SGX Connect was launched, which allowed global investors who invest in Indian securities through SGX to trade through this collaboration. This facility would create a larger pool of liquidity for financial products and bring international financial institutions to India. The NSE IFSC-SGX Connect is expected to be operational by June 2023. It is to be noted that stock trading volumes have increased in IFSC from $3.4 billion a day in 2020 to $14.6 billion a day in 2022. The collaboration of NSE with SGX would result in a multi-fold increase in trading volumes going forward. The Government recognised the opportunity in NSE IFSC-SGX Connect and provided a very essential tax exemption to promote the trading of securities in the IFSC, thereby inviting more foreign participation.

Further, to facilitate the Transfer of funds from offshore units, the Income-tax Act provides that any transfer of assets of the original fund (non-resident) to a resultant fund located in IFSC, is not regarded as a taxable transfer for the original. Earlier, to become eligible for such an exemption, the deadline for such a transfer of funds was March 31, 2023. The said deadline for transferring assets from the original fund to a resultant fund in IFSC has been extended to March 31, 2025.

Data Embassies & other regulatory measures

Further, there are several other regulatory measures to promote the IFSC, including a proposal for the establishment of data embassies inside the IFSC. This shall enable the secure storing of critical data at an alternate location as part of the disaster recovery plan. Further, there is also a proposal for the establishment of subsidiaries of EXIM Banks to promote trade financing from IFSC. All these steps will increase the traction in IFSC. 

Future Outlook

The proactiveness shown by the Government in legislating required changes in the IFSC-related framework demonstrates that India aspires to be a prominent financial centre, globally. There is a continued effort from policymakers to weed out issues that impede the continuous development of the IFSC. The Economic Survey released by the Government already recognises that IFSC has become a major source of capital investment in India which would augment the financial resources required for India’s economic growth. This Amrit Kaal Budget has laid a strong foundational base for a developing India, propelling India’s growth for the next 25 years, where IFSC shall play a key role.